Information Flows And Networks I

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Altering Probability Distributions

Note: in order to run the simulation referred to in this slide, go here, to the Java Applet version. You will be directed to download the latest version of the Java plug-in.

Presently, we add explore the influence of the simulation's parameters. In particular, this slide lets you alter the properties of the two candidates' probability distributions. After some experimentation, it becomes clear that each manager derives benefit from increases in both the mean value and the variance of her first-pick candidate. The effect of increased variance, though a bit counter-intuitive at first glance, is consistent with the concept of option value discussed in the previous slide.

Note, however, that increased variance in the value of the favored candidate does add an element of uncertainty to the manager's life. The curve of her payoff becomes relatively erratic, as opposed to the constant-slope curve of a manager that goes for the low-risk candidate first. In this sense, it is better to favor a candidate with a high mean value and a low variance as opposed to one with a low mean and a high variance, even if on average the two strategies produce the same results.

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