1 - THE STOCHASTIC VIEW OF ECONOMICS

Abstract

This chapter discusses the application of stochastic analysis in economic models based on a few fundamental considerations. It focuses on the need for operational presentation of the mathematical results in stochastic processes, stochastic control, and stochastic programming that have actual or potential usefulness in economic models. It discusses empirical applications primarily for illustrative purposes to highlight the complexities of calculation involved and the nature of pay-offs expected. In realistic applications, the researcher should consider a few stochastic methods as broad guidelines, although in near future, the computational difficulties would be considerably reduced as a result of the recent trend of developments of computer algorithms in stochastic control and mathematical programming. The chapter highlights the applications of economic models primarily in the macrodynamic fields of economic growth, development, and investment planning. In the fields of operations research, stochastic methods, for example, stochastic programming and control, are most frequently applied to microeconomic fields such as the firm, the industry, and the projects.