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Simulation of an objective variable’s probability distribution

In: Rational Decision Making

Author

Listed:
  • Franz Eisenführ
  • Martin Weber

    (University of Mannheim)

  • Thomas Langer

    (University of Münster)

Abstract

Summary Knowledge of the corresponding probability distributions is necessary for rational decisions between alternatives with uncertain outcomes.. An objective variable’s distribution can be specified directly only in simple cases. if there is more than one uncertain factor influencing the objective variable, it is sensible to estimate the distributions of the influencing factors first and then derive the distribution of the objective variable afterwards. It is often not possible to determine the resulting objective variable’s distribution analytically. Using simulation as a tool, however, one can approximate this distribution with sufficient accuracy. Today, such simulations can be executed easily with common spreadsheet programs. Simulations become more complex if dependencies exist between the influencing factors that need to be considered in the simulation model.

Suggested Citation

  • Franz Eisenführ & Martin Weber & Thomas Langer, 2010. "Simulation of an objective variable’s probability distribution," Springer Books, in: Rational Decision Making, chapter 0, pages 205-233, Springer.
    • Handle: RePEc:spr:sprchp:978-3-642-02851-9_8
    DOI: 10.1007/978-3-642-02851-9_8
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