Probability Models for Economic Decisions

Abstract

This book is an introduction to the use of probability models for analyzing risks and economic decisions. Some prior study of probability may be desirable but is not assumed here, as the basic ideas of probability are introduced in the book itself. Throughout this book, the focus is on showing the reader how to use probability in complex realistic situations. All the analytical work in this book is done in Microsoft Excel spreadsheets, because the spreadsheet medium enables students to handle much more complex problems than they could handle with traditional ways of representing mathematical formulas. As a result of this emphasis on spreadsheet modeling, many readers may also learn sophisticated spreadsheet skills from this book. But the main goal of the book is to make the practical power of probability analysis accessible to students at the undergraduate or MBA level. The ultimate goal of any quantitative-analysis course should be to teach students the art of making quantitative models that can give practical insights into real decision problems. But students usually have difficulty with complex models that involve more than two variables, and so quantitative methods are often taught only in the context of simple applications that lack any realistic complexity. The typical result is that even good students who show a mastery of

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