It should not be surprising that different decision problems exist once you breakdown the type of problems faced. There is a continuum of knowledge between what we know versus what we do not know. For risk management, this means that some risks are well-defined while other are not so easy to describe For the well-known, we have well defined pay-offs and well defined probabilities for those pay-off. For the unknown risks, the pay-offs are not well-known and the probabilities are not easily measurable.
The type of decision process to be used has to match the information that is available. Decision-makers have to map the process into the amount of information that is know about a particular problem. For those problems where the risks or information is well-know, an algorithm can be used. This can be as easy as following a recipe. When there is a higher degree of unknown risks, it is harder to use a well-defined decision process. Probabilities become more subjective. For these types of decisions, heuristics or rules of thumb may better serve the decision-maker.
For investments, more complex decisions require more discretion and adaptive behavior. Quantitative investing is better served for the knowable risks.
The type of decision process to be used has to match the information that is available. Decision-makers have to map the process into the amount of information that is know about a particular problem. For those problems where the risks or information is well-know, an algorithm can be used. This can be as easy as following a recipe. When there is a higher degree of unknown risks, it is harder to use a well-defined decision process. Probabilities become more subjective. For these types of decisions, heuristics or rules of thumb may better serve the decision-maker.
For investments, more complex decisions require more discretion and adaptive behavior. Quantitative investing is better served for the knowable risks.
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