Decision making under risk with continuous states of nature
AbstractMany real-world decision making situation are associated with uncertainty regarding future state of the World. Traditionally, in such situation different (and discrete) scenarios – future states of nature – are considered. This domain of decision making is denoted as decision making under risk. However, limitation to some set of discrete scenarios is somewhat unnatural as future reality might not choose one of considered scenarios, but some other scenario or a scenario in between. The aim of this paper is to propose a more natural approach with continuum states of nature, where all scenarios expressed by their probability density function from some reasonable interval are taken into consideration. The approach is illustrated by a numerical example and is compared with the corresponding decision making under risk with discrete states of nature.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 42856.
Date of creation: 25 Nov 2012
Date of revision:
continuous states of nature; decision making under risk; scenario; utility function;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-12-10 (All new papers)
- NEP-CBE-2012-12-10 (Cognitive & Behavioural Economics)
- NEP-MIC-2012-12-10 (Microeconomics)
- NEP-UPT-2012-12-10 (Utility Models & Prospect Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kahneman, Daniel & Tversky, Amos, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Econometrica, Econometric Society,
Econometric Society, vol. 47(2), pages 263-91, March.
- Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
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