Page 92 - DCOM507_STOCK_MARKET_OPERATIONS

Unit 4: Risk and Return

Notes
Figure 4.4: Utility function and Risk Taking

Risk averse
Utility
Risk neutral

Risk Preferring

O Money

Self Assessment

State whether the following statements are true or false:

15. In an efficient capital market, the significant principle to consider is that, investors should
not hold all their eggs in one basket.
16. The empirical facts show that mass of investors are risk-averse.

Case Study Product-Risk Analyses at General Motors

eneral Motors faced a fuel tank issue analogous to that in the Ford Pinto case in
two cases. The first was a 1998 Georgia case, Moseley v. General Motors
GCorp., Moseley v. General Motors Corp., 447 S.E.2d 302 (Ga. Ct. App. 1994),
rev’d, Webster v. Boyett, 496 S.E.2d 459 (Ga. 1998), which involved a side saddle fuel tank
design that had been the target of numerous other lawsuits. In this particular case, Moseley
was driving a GM pickup truck that was hit broadside by a drunk driver of another pickup
truck. Moseley survived the crash and suffered no internal injuries, but the gas tank
ruptured and the truck caught fire, and Moseley was burned alive after impact. The jury
concluded that the product defect pertained not simply to the placement of the fuel tanks,
but also to the straps that bound the tank to the car and could potentially puncture the
tank.
In terms of the overall risk posed by this particular truck design, GM trucks did not fare
much worse than Ford trucks: The GM trucks had 1.51 deaths per 10,000 crashes, as compared
to 1.45 deaths per 10,000 crashes for Ford. GM’s extensive testing of the fuel tank system
was the object of the litigation. The truck exceeded NHTSA standards by a substantial
degree: From a regulatory standpoint, the truck design was not inadequate. But a key
witness in the case presented the detailed GM analysis of fuel-fed fires and the costs of
eliminating them, making “they knew” the “constant refrain among the jurors
interviewed.” The jury awarded the plaintiffs $4 million in compensatory damages, $1 in
pain and suffering, and $101 million in punitive damages. To calculate the punitive damages
amount, the jurors engaged in an arbitrary mathematical exercise. They awarded an amount
equal to twenty dollars for each of the 500,000 GM trucks on the road, and added a bonus
$1 million “exclamation point.”
Contd...

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