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Model decisions involving uncertainty

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Can you describe how to model decisions involving uncertainty? Discuss the various strategies and please also include examples in the solution.

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Solution Summary

This solution helps explains model decisions involving uncertainty. It discusses various strategies designed to model decisions, including rational expectations, sensitivity analysis and Monte Carlo simulations. The explanation is provided in 368 words.

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Question: Can you describe how to model decisions involving uncertainty?

Almost all practical problems involve some type of uncertainty. There are a number of strategies designed to model this type of decision. Suppose we are trying to model a consumer who is making a decision about how to save for retirement. He knows that investing in the stock market is a good idea in stable economic times, but that when the economy has a downturn, he can lose quite a bit. He also knows that he can put the money under his mattress, and be fairly certain his house ...

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