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Quantitative Finance by Matt Davison

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Chapter 3

The Classical Approach to Decision Making under Uncertainty

3.1 CHAPTER SUMMARY

This short chapter describes how decision makers can approach problems with uncertain outcomes. Different types of decision makers, beginning with the expected value decision makers, proceeding to those who minimize the worst-case scenario, and concluding with the expected utility decision makers, are described.

Making well-informed decisions under any type of uncertainty requires a good understanding of probabilities. This book presupposes at least an elementary understanding of probability theory, including an understanding of probability density functions for continuous random variables and how to compute and interpret their expectations and other moments. ...

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