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Prospect theory. Daniel Kahneman, who won the 2002 Nobel Memorial Prize in Economics for his work developing prospect theory. Prospect theory is a theory of behavioral economics, judgment and decision making that was developed by Daniel Kahneman and Amos Tversky in 1979. [1] The theory was cited in the decision to award Kahneman the 2002 Nobel ...
The decision-matrix method, also Pugh method or Pugh concept selection, invented by Stuart Pugh, [1] is a qualitative technique used to rank the multi-dimensional options of an option set. It is frequently used in engineering for making design decisions but can also be used to rank investment options, vendor options, product options or any ...
In this example a company should prefer product B's risk and payoffs under realistic risk preference coefficients. Multiple-criteria decision-making (MCDM) or multiple-criteria decision analysis (MCDA) is a sub-discipline of operations research that explicitly evaluates multiple conflicting criteria in decision making (both in daily life and in settings such as business, government and medicine).
This is known as the internal ratings-based (IRB) approach to capital requirements for credit risk. Only banks meeting certain minimum conditions, disclosure requirements and approval from their national supervisor are allowed to use this approach in estimating capital for various exposures. [1][2] Reforms to the internal ratings-based approach ...
Risk is the lack of certainty about the outcome of making a particular choice. Statistically, the level of downside risk can be calculated as the product of the probability that harm occurs (e.g., that an accident happens) multiplied by the severity of that harm (i.e., the average amount of harm or more conservatively the maximum credible amount of harm).
Weighted sum model. In decision theory, the weighted sum model (WSM), [1][2] also called weighted linear combination (WLC) [3] or simple additive weighting (SAW), [4] is the best known and simplest multi-criteria decision analysis (MCDA) / multi-criteria decision making method for evaluating a number of alternatives in terms of a number of ...
The rank-dependent expected utility model (originally called anticipated utility) is a generalized expected utility model of choice under uncertainty, designed to explain the behaviour observed in the Allais paradox, as well as for the observation that many people both purchase lottery tickets (implying risk-loving preferences) and insure against losses (implying risk aversion).
The problem is then to devise a way of combining the experience of the group with the experience of the individual risk to calculate the premium better. Credibility theory provides a solution to this problem. For actuaries, it is important to know credibility theory in order to calculate a premium for a group of insurance contracts. The goal is ...