Risk modeling using direct solution of expected utility maximization problems Public Deposited

http://ir.library.oregonstate.edu/concern/graduate_thesis_or_dissertations/qv33s064p

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  • A model of agricultural decision making is developed and tested in this thesis. The expected value of utility evaluated under alternative outcomes is directly maximized in a nonlinear programming model. Two features of the model distinguished it from traditional risk programming models. First, alternative attitudes towards the assumption of risk are implicitly specified by the choice of the utility function. Second, the empirical distribution of the uncertain parameters directly enter the model, thus avoiding assumptions regarding the parameters distributional form. Testing of the model in an experimental setting confirmed the ability of the model to obtain different solutions dependent upon the decision maker's risk attitudes and the distribution of the parameters. The model is next tested in an applied setting. Optimal wheat marketing strategies are determined under various price outcomes and utility functional forms. Solutions are found to be (with minor exceptions) invariant for the four wheat producers included in the study under different specifications of the utility functions. However, solutions did change when risk aversion attitudes were increased beyond those found among the interviewed producers. The model may thus be important in those instances where uncertainty is present, utility functions are known, and empirical distributions of the uncertain parameters are available. The article format was chosen for this thesis. The thesis is divided into three autonomous chapters. Chapter 1 presents a general overview of decision making under uncertainty and explore the problems of traditional programming approaches. Chapter 2 develops the expected utility maximization model and tests its performance in an experimental setting. Chapter 3 presents the results of the model's application to the determination of an optimal postharvest marketing strategy for soft white wheat.
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