1. A Bayesian decision model based on expected utility and uncertainty risk.
- Author
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Park, Changsoon, Ahn, Suneung, and Lee, Sangwon
- Subjects
- *
BAYESIAN analysis , *DECISION theory , *MATHEMATICAL models , *EXPECTED utility , *UNCERTAINTY (Information theory) , *LEVY processes , *DISTRIBUTION (Probability theory) - Abstract
Risk is caused by the uncertainty of state of nature and a decision maker's selection, and the result may appear to be an unfavorable outcome. Therefore, a decision maker wants to maximize an expected return with minimal risk exposures. In this paper, we propose an expected utility and uncertainty risk (EU-UR) model based on the reference prior, which extends the classical decision model under uncertainty. The EU-UR model is made by making a compromise between measures of expected utility and uncertainty. The model is empirically validated by applying to the Levy's case and the Allais paradox. [ABSTRACT FROM AUTHOR]
- Published
- 2014
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