Economic Decision Problems Research Articles

Decision trees for monotone price models

In economic decision problems such as credit loan approval or risk analysis, models are required to be monotone with respect to the decision variables involved. Also in hedonic price models it is natural to impose monotonicity constraints on the price rule or function. If a model is obtained by a “unbiased” search through the data, it mostly does not have this property even if the underlying database is monotone. In this paper, we present methods to enforce monotonicity of decision trees for price prediction. Measures for the degree of monotonicity of data are defined and an algorithm is constructed to make non-monotone data sets monotone. It is shown that monotone data truncated with noise can be restored almost to the original data by applying this algorithm. Furthermore, we demonstrate in a case study on house prices that monotone decision trees derived from cleaned data have significantly smaller prediction errors than trees generated using raw data.

L'actuariat au siècle des Lumières

Dans les annees 1780, plusieurs mathematiciens abordent de la meme maniere les problemes de decision economique et statistique. Condorcet et Laplace, en France, Tetens, au Danemark, proposent de calculer le risque de faillite de la compagnie d'assurances avec les outils mathematiques qu'ils appliquent egalement au risque d'estimation. L'analogie mathematique est d'ailleurs explicite chez eux. Si les resultats de Tetens apparaissent finalement modestes au regard de ceux de Laplace, il ne faut pas oublier que le Francais affine pendant encore vingt ans l'instrument qui lui a permis de donner une synthese magistrale. Laplace et Tetens n'ont vraisemblablement pas eu connaissance de leurs travaux respectifs, et la concomitance de leurs recherches est d'autant plus etonnante qu'a la meme epoque, Richard Price, qui s'interessait egalement a l'assurance et a l'estimation statistique, ne percut pas la ressemblance formelle entre ces deux sujets.

The German struggle between the ‘Bodenreinertragslehre’ (land rent theory) and ‘Waldreinertragslehre’ (theory of the highest revenue) belongs to the past — but what is left?

The beginning of the land rent theory is closely related to the German forest economists Friedrich Wilhelm Leopold Pfeil and Johann Christian Hundeshagen (1828). It was further developed by Gottlob König (1864), Johann Heinrich v. Thünen, Max Robert Preßler, Gustav Heyer, Max Endres and in particular by Martin Faustmann (1849). His 1849 published and well known formula may be seen as the center of the land rent theory. However, the application of this concept demanded a considerable change of forest management practice due to the reduction of usual rotations and stocking density. Eventually, the land rent theory conflicted with the principle of sustained yield which had become the central idea of forestry in Germany in the 19th century. Since forestry under German conditions did not start as an investment on bare forest land, but had to manage existing forests under the principle of sustainability, the theory of the highest revenue seemed to be a more appropriate guideline for forestry. However, the maximization of the highest revenue assumed a marginal interest rate of 0% because the time span between input and output was not considered. Besides that, this principle also conflicted with the reality of forestry, because the scarcity of financial funds was not regarded. So far, both theories have not delivered solutions useful to real forest economic decision problems in Germany. Using an example from Lower Saxony, it is demonstrated that considering the objective of sustainability leads to results which are in accordance with the reality and the economic theory.

EXPLOITING UNCERTAINTY—INVESTMENT OPPORTUNITIES AS REAL OPTIONS: A NEW WAY OF THINKING IN ENGINEERING ECONOMICS

A new trend in corporate planning is to exploit uncertainty by taking investment opportunities as real options. This options approach is to complement the conventional net present value (NPV) criterion in evaluating risky investments. In this paper, we take a broad look at the real options approach to various engineering economic decision problems, laying out how it provides an immediate and important perspective on value creation in an uncertain world. Unlike financial options, real options analysisdeals with investments in real assets, which is one of the primary interest areas in engineering economics. For that reason, we believe that any advancement in the real options decision framework will benefit the field of engineering economics.

Anonymous Games with Binary Actions

In many economic decision problems the preferences of economic agents depend on the numbers or proportions of individuals choosing the same decision or other decisions. Examples include network or congestion externalities, location choices of firms, the tourist's choice of a vacation destination, the visit of public events like concerts, or the purchase of goods that are subject to fashion. In this article the relating equilibrium characterization and selection questions are formulated and solved in terms of anonymous games with a continuum of players facing a binary decision problem. Journal of Economic Literature Classification Numbers: C72, D62.

Is multi-tasking complex?

In a simple economic decision problem with multi-tasking the dimensionality of the problem is neither a necessary nor a sufficient measure of complexity. Rather, dimension is good measure of complexity when there is an aggregate resource constraint that creates an interaction between the different activities, resulting in a problem with high algorithmic complexity.

The value of information: The case of signal-dependent opportunity sets

Abstract We generalize the economic decision problem considered by Blackwell (1953) in which a decision-maker chooses an action after observing a signal correlated to the state of nature. Unlike Blackwell's case where the feasible set is fixed, in our framework the feasible set of actions depends on the signal and the information system. We argue that such a framework has more significance to economic models. As was demonstrated by Hirshleifer (1971) in such cases, contrary to Blackwell's well-known result, more information may be disadvantageous. We derive conditions for this general model which guarantee that more information is beneficial.

Approximation of expected returns and optimal decisions under uncertainty using mean and mean absolute deviation

We consider economic decision problems under uncertainty consisting of choosing an optimal decisionX, so as to maximize to expected value of an objective function depending on a stochastic parameterp. The paper establishes an optimal policy intervalXA ⩽X1 ⩽XB, where the boundsXA,XB are given in terms of simple parameters of the distribution ofp, in particular the meanμ, and the mean absolute deviationd=E ¦p−μ ¦. The convexity assumptions needed to establish such bounds are shown to hold naturally in some classical problems of production under uncertainty.

Acceptable Versus Straightforward Game Forms: An Example

The description of social decision mechanisms as non-cooperative game forms has recently been the subject of much research. This note concerns two properties of game forms which have attracted particular interest. Hurwicz and Schmeidler (1978) studied game forms which are acceptable in the sense that every profile of player characteristics admits a Nash equilibirum and every Nash equilibrium outcome is Pareto optimal. Gibbard (1973) termed a game form straightforward if there is a dominant strategy for each player characteristic. To avoid repetition, in this paper the term straightforward will be applied only to game forms with the additional property that every dominant strategy equilibrium is Pareto optimal. This note describes an example of a natural economic decision problem for which there exist non-dictatorial acceptable game forms and non-dictatorial straightforward game forms, but no non-dictatorial game forms have both properties. In other words, any game form with well behaved dominant strategy equilibria must have badly behaved non-dominant strategy equilibria. Moreover, there

Systems Analysis by Multilevel Methods: With Applications to Economics and Management

This book presents a survey of usable multilevel methods for modeling and solving decision problems in economics and management. The methods are largely extensions of linear programming and fall within the realm of column generation and decomposition. About one third of the book is concerned with methods and the rest describes case studies where these methods have actually been used. They are taken from areas such as national and regional economic planning, production planning, and transportation planning.

Systems Analysis by Multilevel Methods; With Applications to Economics and Management

The book presents a survey of usable multilevel methods for modeling and solving decision problems in economics and management. The methods ate largely extensions of linear programming and fall within the realm of column generation and decomposition. About one third of the book is concerned with methods and the rest describes case studies where these methods have actually been used. They are taken from areas such as national and regional economic planning, production planning, and transportation planning. Contents 1 Introduction 2 Fundamental concepts 3 Multilevel solution methods 4 Numerical experiences with Daiu/ig-Wolfe decomposition 5 National and regional economic planning 6 Planning of production and sales programs in corporations 7 Operations management 8 Distribution systems 9 Freight ship route scheduling and electricity generatiun 10 Water pollution control 11 Conclusion

Optimal Investment and Consumption Strategies Under Risk for a Class of Utility Functions

This paper develops a sequential model of the individual's economic decision problem under risk. On the basis of this model, optimal consumption, investment, and borrowing-lending strategies are obtained in closed form for a class of utility functions. For a subset of this class the optimal consumption strategy satisfies the permanent income hypothesis precisely. The optimal investment strategies have the property that the optimal mix of risky investments is independent of wealth, noncapital income, age, and impatience to consume. Necessary and sufficient conditions for long-run capital growth are also given.

An Induced Theory of the Firm Under Risk: The Pure Mutual Fund

In two previous articles [11] and [12] a family of normative models of the individual's economic decision problem under risk was presented. At the same time, certain implications of these models with respect to individual behavior were deduced for a class of utility functions. This paper will show that these models also give rise to an induced theory of the formation and operation of firms under risk for the same class of utility functions.

Control Theory for Agricultural Policy: Methods and Problems in Operational Models

IN VIEW of the large amount of research by agricultural economists that leans heavily for justification on its contribution to policy decisions, it is surprising that so little effort has been devoted to systematic utilization of such research. Or considered from the other side, we might have expected more research devoted explicitly to utilization of objective information for policy purposes, and that work could exert its influence on the research that purports to be policy oriented. We have apparently conceived policy decisions as being of such a subjective nature that researchers should stop short of anything like an optimization model for policy purposes. An exception to this point of view is that expressed in the recent book by Fox, Sengupta, and Thorbecke [5]. Recently, there has been an inclination to move further in the direction of trying to quantify social costs asssociated with various policy actions [11, 12, 16, 17], but we need to go another step by using these quantitative measures in the objective function of an intertemporal optimization model. Gustafson's pioneering work in models for optimal grain storage is an example of the direction that we should be moving [7], as is also the general theory of economic policy set out in [5]. Such models take us into the realm of modern control theory. Control theory encompasses not only recent extensions of the calculus of variations, including Pontryagin's work [13], but also discrete time optimization models such as Rosen's convex programming formulations [14] and Bellman's dynamic programming [3]. The latter encompasses the methodology used by Gustafson in his storage control models. Although the classical continuous time models are most applicable to physical phenomena, the discrete time models are usually better adapted to economics. Most decision problems in economics are periodic, and in agriculture, the period is often a year. Of course, economic problems can be approximated by continuous variational models, but numerical solution of these models usually requires discrete approximation methods. Therefore, it would seem advantageous to use a discrete model at the start since it is more realistic and can be solved directly. One advantage of a continuous model is the ability to treat end points of the time horizon analytically through the transversality conditions. For numerical analysis, the discrete model is satisfactory on this point, too, because the time horizon can be arbitrarily extended until the solution values

Economic Objectives and Decision Problems

This paper surveys some classical decision problems with and without uncertainty. From the survey, it is concluded that the natural generalization of these problems leads to the problem of describing preference orderings over sets of stochastic processes. It is shown that the decision maker can describe a preference ordering of this kind by stating that he is exposed to a risk, represented by a stochastic process, and that his objective is to find the decision which will minimize the probability of his ruin. If this probability is equal to one, the natural objective is to maximize the expected time before ruin occurs.

Enkele algemene beschouwingen in verband met de uit‐voering van het Deltaplan*

SummaryThe object of this paper is to show some statistical investigations concerning the determination of the design of the dams of the Delta Plan in the Netherlands.For the determination of the height of the dams, regarding overflow, statistical analysis must be applied on the actual observations of stormflood levels and wave heights. The extrapolation of the frequency curves of these data is one of the basic problems. The frequency curves of wave heights, periods etc. are determined by means of an electronic computer. An important object of study is the wave attack on the dam or dike. The damage due to wave attack will usually be determined by means of model wave tests in an Hydraulic Laboratory. The results determine the shape of the dike, especially the incline of the slopes and the materials of which the slope is constructed e.g. stone or asphalt.The economic decision problem shows the background of the determination of the optimal dike construction, in connection with the amount of money to be invested in dikebuilding: after optimal dike construction the expected capitalized values of all future losses by damage and the costs to be invested must be minimal. It is clear that the determination of these expected losses also depends on statistical investigations.

Economic Decision Problems for Flood Prevention

Economic Decision Problems for Flood Prevention