week3da - Spring, 2010 DecisionAnalysis MS405 Risk Profiles...

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Kemal Kılıç, Sabancı Üniversitesi Kemal Kılıç, Sabancı Üniversitesi Spring, 20 Spring, 20 10 10 Week 3 1 Decision Analysis   MS 405    Risk Profiles and Attitudes Kemal Kılıç Faculty of Engineering and Natural Sciences
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Kemal Kılıç, Sabancı Üniversitesi Kemal Kılıç, Sabancı Üniversitesi Spring, 20 Spring, 20 10 10 Week 3 - Making Choices ( Ch 4 ) A decision tree, a structured problem, presents many alternatives. Which alternative is the best? Learn how to use the details in a structured problem to find a preferred alternative. Decision Trees and EMV Risk Profiles and Dominance: help make decisions considering attitude towards riskiness of alternatives Deterministic and Stochastic Dominance Week 3 2
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Kemal Kılıç, Sabancı Üniversitesi Kemal Kılıç, Sabancı Üniversitesi Spring, 20 Spring, 20 10 10 Expected Monetary Value One way to choose among risky alternatives is to pick the alternative with the best ( highest for maximization/ lowest for minimization) expected value (EV)----necessary calculations? When the decision consequences involve only money, we can calculate the expected monetary value (EMV) Week 3 3
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Kemal Kılıç, Sabancı Üniversitesi Kemal Kılıç, Sabancı Üniversitesi Spring, 20 Spring, 20 10 10 Risk Sometimes you need alternatives to the Decision Criterion: Expected Value (always choose highest expected value) A common concern that is not considered is that of risk The actual outcome is not the expected value outcome; it may be much higher or lower depending upon the decision outcome space Decision makers are often concerned about the risk of bad outcomes Week 3 4
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Kemal Kılıç, Sabancı Üniversitesi Kemal Kılıç, Sabancı Üniversitesi Spring, 20 Spring, 20 10 10 Risk We often fail to use the Expected Value decision criterion! If you buy any insurance, the expected value is always in favor of the insurance company We buy insurance because the risk of loss is so high Gambling? Explicit risk consideration is a way to model this situation Week 3 5
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Kemal Kılıç, Sabancı Üniversitesi Kemal Kılıç, Sabancı Üniversitesi Spring, 20 Spring, 20 10 10 Explicit Risk Modeling Sometimes we show the Decision Maker not only the preferred decision based on expected value, but also the risk associated with the different decisions We normally present decision risk by showing the distributions of the possible outcomes for each decision Sometimes, decisions can be rejected simply because there are outcomes too risky to accept The insurance decision This will always depend upon the circumstances Week 3 6
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Kemal Kılıç, Sabancı Üniversitesi Kemal Kılıç, Sabancı Üniversitesi Spring, 20 Spring, 20 10 10 Decision Path: A path starting at the left most node up to the values at the end of a branch by selecting one alternative from a decision node or by following one outcome from an uncertainty node. Represents a
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This note was uploaded on 12/19/2011 for the course ECON Econ203 taught by Professor Majdabpadawnan during the Spring '11 term at University of Maribor.

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week3da - Spring, 2010 DecisionAnalysis MS405 Risk Profiles...

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