Econ171-Spring2010-01-Intro-handout

Econ171-Spring2010-01-Intro-handout - Economics 171...

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Unformatted text preview: Economics 171 ecisions Under Uncertainty Decisions Under Uncertainty 1. Introduction pring 010 Spring 2010 Herb Newhouse 1 eadings Readings achina Reader Machina Reader Handout 2: p. 8 10. D. V. Lindley, Making Decisions (Available in SSH Reserves.) Ch. 1 4.1 7.6 2 utline Outline ositive decision theory versus normative Positive decision theory versus normative decision theory. he representation of uncertainty The representation of uncertainty. Decisions States of Nature Outcomes 3 utline Outline riteria for choice under uncertainty Criteria for choice under uncertainty. Non-probabilistic criteria. he mean ariance criterion The mean-variance criterion. First order stochastic dominance preference. he expected utility criterion The expected utility criterion. 4 ositive vs. Normative Decision Theory Positive vs. Normative Decision Theory ositive xplains what is Positive Explains what is. Description of how people make decisions. Normative Explains what should be. Value judgment. Prescriptive. Logical, mathematical study of decision making. 5 ample Decision Sample Decision hoice Between Two Lotteries Choice Between Two Lotteries olor hite ed reen ello Color: White Red Green Yellow % : 9 6 1 3 A Prize: 45 30-15 B % : 9 7 1 2 rize: 5 5 Prize: 45-10-15 6 ample Decision Sample Decision nother Choice Between Two Lotteries Another Choice Between Two Lotteries olor hite ed reen l e ello Color: White Red Green Blue Yellow % : 9 6 1 1 2 C Prize: 45 30-15-15 D % : 9 6 1 1 2 rize: 5 5 5 Prize: 45 45-10-15 7 he Representation of Uncertainty The Representation of Uncertainty ecisions/Actions Decisions/Actions Describe every relevant choice in the roblem problem. Each decision is exclusive. n exhaustive list An exhaustive list. In our first example its the choice of either ttery A or lottery B lottery A or lottery B. Available decisions in a problem denoted ( d 1 , d 2 , d 3 , . . . , d m ) 8 he Representation of Uncertainty The Representation of Uncertainty vents/States of Nature Events/States of Nature What can happen thats outside of the ecision makers control decision maker s control....
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This note was uploaded on 10/21/2010 for the course ECON 809880 taught by Professor Herbnewhouse during the Spring '09 term at UCSD.

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Econ171-Spring2010-01-Intro-handout - Economics 171...

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