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Problem_Session_5

# Problem_Session_5 - MS&E 252 Decision Analysis I Problem...

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1 MS&E 252 Decision Analysis I Problem Session 5

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2 Midterm Announcements Midterm is on Tuesday Nov 6 th Time: 11am-12:15pm Location: Kresge Auditorium Materials Covered: All class materials up to Thursday Nov 1 st
3 Midterm Structure Similar to the Midterm Practice 15 Probabilistic questions Best review? Homework problems + practice midterms Questions? Post on coursework Look out for additional office hours announcement

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4 What concepts do we expect you to master? U-Curves When do we need them? How do we assess them? How do we use them? Solving problems using a u-curve PIBP and PISP – revisited Delta property Delta people Risk aversion
5 How much do you value a deal? When there is no uncertainty, we do not need u- values at all... … But people place different values on uncertain deals. People react differently due to many factors: their taste for risk their wealth state

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6 When we study risk preference, we study U-curves. “A person’s risk preference (or risk attitude ) describes the relation between an uncertain deal and that person’s PISP and PIBP for the deal.” Tradeoff between greed and fear \$150,000 -\$75,000 0.5 ~ ? Greed Fear
7 Why do we need U-curves? U-curves are a good means for us to assess the values people place on uncertain deals. Types of risk preference: \$ u \$ u \$ u risk-averse risk-neutral risk-seeking

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8 Using U-curves – How do we “roll back” a tree? .4*.95+.6*.32 Uncertainties: Take e-value of u-values = 0.63 Decisions: Pick best u-value = 0.57 Max(.4, .57, .63) 0.4 0.6 S R 0.95 0.32 u O I 0.40 0.63 0.57 P u
9 Using U-curves – Finding a Certain Equivalent graphically. Example – Finding the CE of a deal with 50% chance of \$80 and 50% chance of \$10. \$100 \$0 \$80 \$10 u(\$10) u(\$80) .5u(\$80)+.5u(\$10) = u(CE) CE

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10 Using U-curves – Why is it important? Can also be used to determine the Value of Clairvoyance (iterative construction). Reminds you that you should calculate the e-value of the u-values, not the e- value of the dollar amounts placed on the prospects. “When faced with a decision tree, unless the decision maker is risk-neutral, always remember to go to u-space, then take the e-value, then go back to \$-space.”
11 What concepts do we expect you to master?

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Problem_Session_5 - MS&E 252 Decision Analysis I Problem...

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