Decision Making Under Conditions of Uncertainty: A Wakeup Call for the Financial Planning Profession

Hopewell, Lynn
October 1997
Journal of Financial Planning;Oct97, Vol. 10 Issue 5, p84
Academic Journal
The article discusses problems associated with decision making, while using illustrative examples to show how uncertainty intrinsic to financial planning decisions. Oddly enough, academic attention to the use of modern quantitative techniques applied to personal financial planning decision-making has been almost nonexistent. The second generation of planning tools will explicitly address uncertainty. Software manufacturers should incorporate Monte Carlo techniques into common tools. Planners must become mote sophisticated in their understanding of uncertainty, and demand the education and tools to deal with it. Models that assume a fixed relationship between inputs and outputs are called deterministic. A deterministic model produces an unambiguous answer. Models that depend on inputs that are influenced by chance are called stochastic. Stochastic models produce many possible answers, described by a distribution. A model that depicts the time of sunset is deterministic because it relies on fixed physical laws. Instead of deterministic models stochastic models will prevail. The typical analysis makes assumptions about the variables and computes an answer. The opportunities to apply the science of decision-making under conditions of uncertainty to financial planning are almost unlimited. INSET: What is a Monte Carlo simulation?..


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