A Computer Program for Decision Rules
Proceedings of the Association for Financial Counseling and Planning Education, 1999
7 Pages Posted: 24 Jan 2018
Date Written: October 16, 1999
In order to understand optimal decision-making about saving, credit use, investing, insurance, and other financial decisions, it is useful to understand decision rules, such as choosing the action with the highest expected value or utility. To understand why people might decisions inconsistent with rational rules, it is useful to consider sub-optimal rules, such as the MaxiMin, MaxiMax, and MiniMax Regret rules (Maurice & Thomas, 1999, pp. 686-689). A decision can be expressed in terms of actions, states of the world, and wealth levels in each action-state combination, as well as probabilities of each state of the world. We have developed a computer program that calculates the best action based on the MaxiMax, Best of the Most Probable, MaxiMin, MiniMax Regret and Laplace decision rules. The program also calculates the best action for the highest expected utility and expected value decision rules for a range of levels of risk aversion (Hanna & Chen, 1997). At the handout at the poster session, will explain each decision rule and give some financial decision examples. A laptop computer is available so that people can try out this program.
Keywords: expected utility, decision rules
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