A state of nature is an external condition that can affect a decision’s payoff but remains outside the decision-maker’s control. Examples include strong or weak market conditions. section 10.1.1
Use states of nature when structuring a decision:
- List the possible external conditions. section 10.1.1
- Record the payoff for each decision alternative under every condition. section 10.1.1
- Choose a decision method suited to the context, such as Maximax when probabilities are unavailable. section 10.1.1
>>> import pandas as pd
>>> payoff_table = pd.DataFrame({
>>> 'Investment Alternatives': investment_alternatives,
>>> 'Strong Economy': strong_economy,
>>> 'Weak Economy': weak_economy
>>> })
>>> print(payoff_table)
Investment Alternatives Strong Economy Weak Economy
0 Stock Market 100000 -120000
1 Professional Soccer Club 60000 -20000
2 Stock Market / Soccer Club (50/50) 80000 -70000
3 Savings Account 35000 35000
A payoff table pairs investment alternatives with strong and weak economic states, making the external conditions explicit. section 10.1.1
