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Discretization Precision and Assessment Error

Author

Listed:
  • Robert K. Hammond

    (Chevron North America Exploration and Production Company, Houston, Texas 77002)

  • J. Eric Bickel

    (Operations Research and Industrial Engineering, The University of Texas, Austin, Texas 78712)

Abstract

Continuous probability distributions are often discretized by assigning a weight to each of several percentiles (e.g., the 10th, 50th, and 90th percentiles). Previous work has analyzed the accuracy of various discretization methods. In practice, however, the assessed percentiles may not be precise. In this paper, we compare the performance of several discretization methods when the probability assessments are subject to error. Our results indicate that one should still strive to use the best discretization method even in the face of assessment error. This is particularly true if one is trying to preserve the variance and higher moments of the continuous distribution.

Suggested Citation

  • Robert K. Hammond & J. Eric Bickel, 2017. "Discretization Precision and Assessment Error," Decision Analysis, INFORMS, vol. 14(1), pages 21-34, March.
    • Handle: RePEc:inm:ordeca:v:14:y:2017:i:1:p:21-34
    DOI: 10.1287/deca.2016.0342
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    References listed on IDEAS

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    1. James E. Smith, 1993. "Moment Methods for Decision Analysis," Management Science, INFORMS, vol. 39(3), pages 340-358, March.
    2. Donald L. Keefer, 1994. "Certainty Equivalents for Three-Point Discrete-Distribution Approximations," Management Science, INFORMS, vol. 40(6), pages 760-773, June.
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