Probability Models for Economic Decisions (with CD-ROM) Book

1	Simulation and Conditional Probability	1
1.0	Getting Started with Simtools in Excel	2
1.1	How to Toss Coins in a Spreadsheet	3
1.2	A Simulation Model of 20 Sales Calls	7
1.3	Analysis Using Excel's Data-Table Command	15
1.4	Conditional Independence	18
1.5	A Continuous Random Skill Variable from a Triangular Distribution	19
1.6	Probability Trees and Bayes' Rule	25
1.7	Advanced Spreadsheet Techniques: Constructing a Table with Multiple Inputs	37
1.8	Using Models	40
1.9	Summary	42
	Exercises	43
2	Discrete Random Variables	47
2.1	Unknown Quantities in Decisions Under Uncertainty	49
2.2	Charting a Probability Distribution	50
2.3	Simulating Discrete Random Variables	53
2.4	Expected Value and Standard Deviation	57
2.5	Estimates from Sample Data	62
2.6	Accuracy of Sample Estimates	66
2.7	Decision Criteria	71
2.8	Multiple Random Variables	75
2.9	Summary	77
	Exercises	78
3	Utility Theory with Constant Risk Tolerance	81
3.1	Taking Account of Risk Aversion: Utility Analysis with Probabilities	82
3.2	Utility Analysis from Simulation Data	92
3.3	The More General Assumption of Linear Risk Tolerance	94
3.4	Advanced Technical Note on Utility Theory	96
3.5	Advanced Technical Note on Constant Risk Tolerance	101
3.6	Summary	105
	Exercises	105
4	Continuous Random Variables	107
4.1	Normal Distributions	108
4.2	EXP and LN	113
4.3	Lognormal Distributions	116
4.4	Generalized Lognormal Distributions	122
4.5	Subjective Probability Assessment	124
4.6	A Decision Problem with Discrete and Continuous Unknowns	131
4.7	Certainty Equivalents of Normal Lotteries	135
4.8	Other Probability Distributions	137
4.9	Summary	145
	Exercises	149
5	Correlation and Multivariate Normal Random Variables	151
5.1	Joint Distributions of Discrete Random Variables	152
5.2	Covariance and Correlation	156
5.3	Linear Functions of Several Random Variables	158
5.4	Estimating Correlations from Data	162
5.5	Making Multivariate Normal Random Variables with CORAND and NORMINV	166
5.6	Portfolio Analysis with Multivariate Normal Asset Returns	171
5.7	Excel Solver and Efficient Portfolio Design	176
5.8	Subjective Assessment of Correlations	182
5.9	Using CORAND with Non-Normal Random Variables	186
5.10	More About Linear Functions of Random Variables	190
5.11	Summary	193
	Exercises	195
6	Conditional Expectation	199
6.1	Dependence Among Random Variables	199
6.2	Estimating Conditional Expectations and Standard Deviations	203
6.3	The Expected-Posterior Law in a Discrete Example	206
6.4	Backwards Analysis of Conditional Expectations in Tree Diagrams	211
6.5	Conditional Expectation Relationships and Correlation	214
6.6	Uncertainty About a Probability	216
6.7	Linear Regression Models	220
6.8	Regression Analysis and Least-Squared Errors	224
6.9	Summary	227
	Exercises	229
7	Optimization of Decision Variables	231
7.1	General Techniques for Using Simulation in Decision Analysis	231
7.2	Strategic Use of Information	241
7.3	Decision Trees	246
7.4	A Simple Bidding Problem	251
7.5	The Winner's Curse	255
7.6	Analyzing Competitive Behavior	263
7.7	Summary	271
	Exercises	273
8	Risk Sharing and Finance	281
8.1	Optimal Risk Sharing in a Partnership of Individuals with Constant Risk Tolerance	282
8.2	Optimality of Linear Rules in the Larger Class of Nonlinear Sharing Rules	291
8.3	Risk Sharing Subject to Moral-Hazard Incentive Constraints	295
8.4	Piecewise-Linear Sharing Rules with Moral Hazard	301
8.5	Corporate Decision Making and Asset Pricing in the Stock Market	305
8.6	Fundamental Ideas of Arbitrage Pricing Theory	317
8.7	Summary	322
	Exercises	323
9	Dynamic Models of Growth and Arrivals	325
9.1	Net Present Value	326
9.2	Forecasting Models	328
9.3	Forecasting Example: Goeing Case	332
9.4	Brownian-Motion Growth Models	339
9.5	Log-Optimal Investment Strategies	343
9.6	Exponential Arrival Models	349
9.7	Queuing Models	356
9.8	A Simple Inventory Model	362
9.9	Project Length and Critical Tasks	366
9.10	Summary	370
	Exercises	372
Appendix	Excel Add-Ins for Use with This Book	377
	Bibliographic Note	387
	Index	389