Decision analysis by augmented probability simulation
Article Abstract:
A generic Monte Carlo method was utilized in finding the alternative of maximum expected utility in a decision analysis. The approach is employed to solve a probability model simulation problem that has been transformed from the original expected utility maximization problem. The scheme is very generic since it accommodates arbitrary probability models, whether they are discrete or continuous, and utility functions, as long as the probability density and the utility function are pointwise evaluable. Simulation is employed from an artificial auxiliary model that augments the original probability model to include an artificial distribution over decision nodes. Experimental results indicate that the method may be very powerful. However, several problems remain, such as the extension of the scheme to sequential decisions.
Publication Name: Management Science
Subject: Business, general
ISSN: 0025-1909
Year: 1999
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Numerical valuation of high dimensional multivariate European securities
Article Abstract:
An attempt is made to solve the problem of pricing a European contingent claim whose payoff is determined by an arbitrary number of risk sources. Efficient numerical techniques based on Monte Carlo simulation are used to generate accurate estimates of realistic European pricing problems. Classical techniques of importance sampling are combined with the method of quadratic resampling, a new error reduction technique for Monte Carlo simulation. This approach accelerates the estimation of the theoretical prices of complex financial instruments to within a few seconds on a PC or workstation and less than a second on parallel supercomputers. It is demonstrated that this strategy is effective for pricing claims that rely on up to 100 underlying economic factors.
Publication Name: Management Science
Subject: Business, general
ISSN: 0025-1909
Year: 1995
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Modifying customer expectations of price decreases for a durable product
Article Abstract:
The introductory signaling strategy used by firms for a new durable product for which customers are expecting price declines over time was examined. A two-period model of a firm that introduces a durable product at the start of the first period was utilized to determine whether it is possible to modify customers' optimistic expectations about price declines. Empirical results showed that these optimistic expectations reduce the willingness of customers to pay a high price when the product is first introduced while compelling them to buying later. A high introductory price credibly signals the low experiential learning for the product to customers. It was also found that introductory signaling creates an artificial learning-curve effect.
Publication Name: Management Science
Subject: Business, general
ISSN: 0025-1909
Year: 1998
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