Financial

Issues in Applying the Decision Theory Model Specifying the states of nature. States of nature atomic yield 18 particular(prenominal) to the last problem at hand. For example, if my decision is whether or non to take my raincoat, relevant states would be rain or no rain. That is, the relevant states of nature be simply those stochastic events whose final result matters to the decision at hand. In an investiture context, these can be taken as different levels of future firm surgery, since it is future operation that determines investment payoff. Specifying prior probabilities of the states of nature. These drive everything the decision master knows up to the beginning of the decision analysis. in that restipulationt are techniques to benefactor specify these probabilities. One technique is to gestate an urn containing 100 drab balls, of which a certain number are red and the ending black. To illustrate, deem an investor wants to assess his/her pr ior probability of upliftedschool future firm performance next year. Envisage a numerate of, translate, $50 on this stateif future performance is senior high you win $50, otherwise you lose $50. Now go steady another(prenominal) bet. You will draw 1 ball from the (opaque) urn. If you draw a red ball you win $50, otherwise you lose $50. How many a(prenominal) an(prenominal) red balls should there be in the urn so that you are indifferent between the 2 bets?

Suppose you decide you would be indifferent if the urn contains 6 red balls. Then, your subjective probability of high future firm performance is 0.06. Since prior probabilities are subjective,! we cannot say that this probability is correct. The point is, however, that in deciding on the number of red balls you are forced to consider everything you know close to the firms future prospects. Specifying payoffs. For each state of nature, spec of your payoff if a particular state happens should be comparatively straightforward. For example, suppose you invest $10,000 in shares of X Ltd. and the high performance state happens. abstract of past...If you want to get a serious essay, order it on our website: OrderCustomPaper.com

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