Problem_Session_5

Problem_Session_5 - 1 MS&E 252 Decision...

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Unformatted text preview: 1 MS&E 252 Decision Analysis I Problem Session 5 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 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 6 When we study risk preference, we study U-curves. A persons risk preference (or risk attitude ) describes the relation between an uncertain deal and that persons 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 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 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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This note was uploaded on 06/16/2010 for the course MS&E 252 taught by Professor Howard during the Fall '08 term at Stanford.

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Problem_Session_5 - 1 MS&E 252 Decision...

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