Decision Making under Risk PART 3 | Expected Opportunity Loss
Автор: Hybrid Accounts
Загружено: 2022-09-10
Просмотров: 717
Описание:
#eol #payoff #probability
Decision making under Risk
Here, probabilities of occurrence of events are known say due to past experience.
Therefore, the concept of Expected Values applies here as all possibilities of states of nature are factored in. This approach can be used by Risk Neutral decision makers
Note:
Expected Value is a long-run average, meaning that it is relevant if the decision is repeated several times such that all states of nature would expectedly be crossed.
Also, reliability of probabilities computed could be questionable as past information used might not be relevant for the future.
Approaches used on Expected Values include:
Expected Monetary Value (EMV)
The decision giving the maximum EMV is chosen.
Expected Opportunity Loss (EOL)
Regret
= Maximum payoff for a given event – All payoffs in that event
The decision giving the minimum EOL is chosen.
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