LAWS 1000 Lecture Notes - Lecture 11: Linear Combination, Random Variable, Mansfield
15 Jul 2020
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Document Summary
Identification of future events (states of nature) is possible. Insufficient information (or unwillingness) to assign the probability of occurrence of the future events. Decisions under uncertainty: several rules and principles have been developed to assist project decision-making in an environment with uncertainty, laplace, maximin (minimax, maximax, hurwicz, maximax regret (savage) Laplace (principle of insufficient reason: nature doesn"t care about you one way or the other; it is neither friendly nor unfriendly to your cause, maximum average profit. Maximin rule: the highest of the lowest npw of a project. Maimaxi rule: the highest of the highest npw of a project. Hurwicz rule: my choice: 70% chance of friendly future events (hence 30% chance of unfriendly future events). 1( profit: optimistc chooses maxmaxi, conservative chooses maximin, middle would choose min x hurwicz. Maximax regret rule (savage: highest future state minus each other state. Risk: future events are known, sufficient information and willingness to assign the probability of occurrence of future events.
