Rational Decision-Making in Business Organizations

Lecture to the memory of Alfred Nobel, December 8, 1978decision making;

Distribution of Mutual Information from Complete and Incomplete Data

Mutual information is widely used, in a descriptive way, to measure the stochastic dependence of categorical random variables. In order to address questions such as the reliability of the descriptive value, one must consider sample-to-population inferential approaches. This paper deals with the posterior distribution of mutual information, as obtained in a Bayesian framework by a second-order Dirichlet prior distribution. The exact analytical expression for the mean, and analytical approximations for the variance, skewness and kurtosis are derived. These approximations have a guaranteed accuracy level of the order O(1/n^3), where n is the sample size. Leading order approximations for the mean and the variance are derived in the case of incomplete samples. The derived analytical expressions allow the distribution of mutual information to be approximated reliably and quickly. In fact, the derived expressions can be computed with the same order of complexity needed for descriptive mutual information. This makes the distribution of mutual information become a concrete alternative to descriptive mutual information in many applications which would benefit from moving to the inductive side. Some of these prospective applications are discussed, and one of them, namely feature selection, is shown to perform significantly better when inductive mutual information is used.Comment: 26 pages, LaTeX, 5 figures, 4 table

Large Social Networks can be Targeted for Viral Marketing with Small Seed Sets

In a "tipping" model, each node in a social network, representing an individual, adopts a behavior if a certain number of his incoming neighbors previously held that property. A key problem for viral marketers is to determine an initial "seed" set in a network such that if given a property then the entire network adopts the behavior. Here we introduce a method for quickly finding seed sets that scales to very large networks. Our approach finds a set of nodes that guarantees spreading to the entire network under the tipping model. After experimentally evaluating 31 real-world networks, we found that our approach often finds such sets that are several orders of magnitude smaller than the population size. Our approach also scales well - on a Friendster social network consisting of 5.6 million nodes and 28 million edges we found a seed sets in under 3.6 hours. We also find that highly clustered local neighborhoods and dense network-wide community structure together suppress the ability of a trend to spread under the tipping model

The Underlying Return Generating Factors for REIT Returns: An Application of Independent Component Analysis

Multi-factor approaches to analysis of real estate returns have, since the pioneering work of Chan, Hendershott and Sanders (1990), emphasised a macro-variables approach in preference to the latent factor approach that formed the original basis of the arbitrage pricing theory. With increasing use of high frequency data and trading strategies and with a growing emphasis on the risks of extreme events, the macro-variable procedure has some deficiencies. This paper explores a third way, with the use of an alternative to the standard principal components approach – independent components analysis (ICA). ICA seeks higher moment independence and maximises in relation to a chosen risk parameter. We apply an ICA based on kurtosis maximisation to weekly US REIT data using a kurtosis maximising algorithm. The results show that ICA is successful in capturing the kurtosis characteristics of REIT returns, offering possibilities for the development of risk management strategies that are sensitive to extreme events and tail distributions.Real Estate Returns, REIT, ICA, Independent Component Analysis

Agricultural Risk Aversion Revisited: A Multicriteria Decision-Making Approach

In modelling farm systems it is widely accepted that risk plays a central role. Furthermore, farmers' risk aversion determines their decisions in both the short and the long run. This paper presents a methodology based on multiple criteria mathematical programming to obtain relative and absolute risk aversion coefficients. We rely on multiattribute utility theory (MAUT) to elicit a separable additive multiattribute utility function and then estimate the risk aversion coefficients and apply this methodology to an irrigated area of Northern Spain. The results show a wide variety of attitudes to risk among farmers, who mainly exhibit decreasing absolute risk aversion (DARA) and constant relative risk aversion (CRRA).Risk analysis, Agriculture, Utility theory, Multiple criteria analysis, Risk and Uncertainty,