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An Introduction to Human Factors
Published in Mark W. Wiggins, Introduction to Human Factors for Organisational Psychologists, 2022
The main difficulty associated with establishing the utility of an investment or outcome is that the ‘values’ will often be the product of a subjective assessment, rather than an objective analysis as is normally the case for cost-benefit analyses. However, Rouse and Boff (1997) suggest that subjective evaluations are not necessarily any less effective than an objective assessment in establishing an accurate outcome. They recommend the application of an approach consistent with Subjective Expected Utility (SEU) theory. This requires that all non-economic costs (c) and returns (r) be converted to a unitary utility scale from which comparisons can be made. For example, the utility (U) of a particular decision can be calculated using this equation that incorporates a series of costs and associated returns. U(c,r) = U[u(c1), u(c2),… u(cN), u(r1), u(r2)… u(rN)]
An experimental investigation of newsvendor decisions under ambiguity
Published in International Journal of Production Research, 2021
Abhishek Shinde, Peeyush Mehta, R. K. Amit
For decision-making under ambiguity, Savage (1954) develops subjective expected utility (SEU) model, which provides axioms for both utility and subjective probability. In SEU model, the axioms permit the decision-maker to have a unique subjective probability distribution; and the decision-maker is subjective expected utility maximiser conditional on the unique subjective probability. However, in one of the early descriptive research, Ellsberg (1961) shows that the decision-makers violate the axioms of SEU, and are ambiguity averse – they prefer a gamble with a known probability distribution over a gamble with an unknown probability distribution. One of the seminal works in newsvendor setting under ambiguity is Scarf (1958) that considers an inventory problem when only mean (μ) and standard deviation (σ) of the demand distribution are known. The inventory policy maximises the minimum expected profit considering all distributions with the given mean and standard deviation. In decision-making under ambiguity, this model can be classified under neoclassical models; the other class of models are behavioural (Wakker 2010).