November 14, 2007

Utility function

Since we're going to spend a little more time on utility functions and statistical decision theory on the Monday after Thanksgiving, I'd like to try something a little more sophisticated than what I showed in class today. Here's teh scenario.

Imagine you have $1000 in your pocket. You're going to spend that imaginary $1000 by allocating it among five possible states of the world:

pE = 1.00
pE = 0.75
pE = 0.50
pE = 0.25
pE = 0.00

(pE is the probability of Sumatran rhino extinction before 2100.) There are two rules you have to follow in allocating your money among the alternatives:

  1. You must allocate all of your money.
  2. You must allocate more money to outcomes with a lower probability of extinction (and less money to those with a higher probability of extinction.

When you've decided on your allocations, please e-mail them to me. Be sure that I can easily tell which dollar amount goes with which pE. I'll combine the separate allocations into a single utility function (by summing across the individual allocations), and we'll use the new utility function in our analysis after Thanksgiving.

Happy Thanksgiving!

Posted by Kent at November 14, 2007 11:53 AM | TrackBack