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Imse3115 Lecture4 5

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10 views24 pages

Imse3115 Lecture4 5

Uploaded by

Prityush Jhaveri
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Range of estimates Expected values Economic Decision Trees Risk

IMSE3115 - Lecture Note 5

Peng-Chu Chen

Department of Industrial and Manufacturing Systems Engineering


The University of Hong Kong
[email protected]

October 7, 2024

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Range of estimates Expected values Economic Decision Trees Risk

Topics

Uncertainty in Future Events


Range of estimates
Expected values
Economic decision trees
Risk

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Uncertainty matters

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Uncertainty about the salvage value

Suppose that at the end of 10 years, the actual salvage vlue for B
were $300 instead of the $400. If all the other estimates were
correct, which alternative is preferred?

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A range of estimates

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Mean values

It is more likely that many parameters are the most likely values,
while some are optimistic and some are pessimistic.

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Probability

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Joint probability I

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Joint probability II

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PW(EV)

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EV(PW) I

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EV(PW) II

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EV(PW) Example I

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EV(PW) Example II

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New product developement

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Decision I

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Decision II

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Decision II

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Car insurance

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Exected values alone not determining the decision

Buying insurance has an expected cost that is $425 per year


higher.
But that insurance limits the maximium loss to $500 rather
than $13,000.
$425 may be worth spending to avoid the risk.

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Standard deviations

Risk: chance of getting an outcome other than the expected


value.
A standard deviation measures the dispersion of outcomes
about the expected value.
√ √
σ = EV(X − mean)2 = EV(X 2 ) − [EV(X )]2 .

Standard deviations for insuring and not insuring.

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Example revisit

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Risk vs. return

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Efficient frontier

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