Varsanyi, Zoltan (2008): A simple model of decision making: How to avoid large outliers?
Download (271kB) | Preview
In this paper I present a simple model through which I examine how large unwanted outcomes in a process subject to one’s decisions can be avoided. The paper has implications for decision makers in the field of economics, financial markets and also everyday life. Probably the most interesting conclusion is that, in certain problems, in order to avoid large unwanted outcomes one, regularly and intentionally, has to make decisions that are not optimal according to his/her existing preference. The reason for it is that the decision rule might get “overfitted” to one’s (recent) experience and may give wrong signals if there is a change, even as temporary as in one single period, in the environment in which decisions are made. I find the optimal decision making strategy in an example case – the optimal strategy, however, may well be different in different real-world situations.
|Item Type:||MPRA Paper|
|Original Title:||A simple model of decision making: How to avoid large outliers?|
|Keywords:||endogeneity; non-stacionarity; outliers; simulation; uncertainty|
|Subjects:||D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C15 - Statistical Simulation Methods: General
|Depositing User:||Zoltan Varsanyi|
|Date Deposited:||11. Jul 2008 04:59|
|Last Modified:||18. Feb 2013 18:47|
Greenspan, A. (2008). We will never have a perfect model of risk. Financial Times, March 16, 2008
Rebonato, R. (2007). Plight of the Fortune Tellers: Why We Need to Manage Financial Risk Differently, Princeton University Press
Sornette, D. (2003). Critical Market Crashes, http://arxiv.org/abs/cond-mat/0301543. Accessed on 10 February 2008.
Taleb, N.N. (2004). Fooled by randomness. Penguin Books
Available Versions of this Item
- A simple model of decision making: How to avoid large outliers? (deposited 11. Jul 2008 04:59) [Currently Displayed]