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The Virtual Center for Environmental Modeling

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Recently, a variant of stochastic dominance called stochastic efficiency with respect to a function (SERF) has been developed and applied. Unlike traditional stochastic dominance approaches, SERF uses the concept of certainty equivalents (CEs) to rank a set of risk-efficient alternatives instead of finding a subset of dominated alternatives. The Screening and Multivariate Analysis for Risk and Tradeoffs (SMART) software package (both web-based and MS Excel spreadsheet applications) has been developed for integrated economic and environmental risk analysis through ranking of risky alternatives using the CE and SERF concepts. CE is a utility-based measure defined as the expected value of an input variable minus the risk premium (the amount of monetary value a decision maker is willing to pay in order to avoid risk). In other words, the CE of a risky strategy is the amount of money at which the decision maker is indifferent between the certain dollar value and the risky strategy. Strategies with higher CEs are preferred to those with lower CEs. The SMART procedure calculates the CE for the decision maker using SERF and also functions as a risk visualization tool for graphically displaying the CE at various levels of decision maker attitude towards risk (e.g., risk neutral, moderately risk averse, or extremely risk averse). SMART then uses the CE calculations at various risk levels to conduct and analyze complex tradeoffs between economic (e.g., gross margin) and environmental (e.g., nitrate leaching) variables or indicators.

Screening and Multivariate Analysis for Risk and Tradeoffs

For additional information on SMART, please contact Dr. Jim Ascough at 970-492-7371 (e-mail: jim.ascough@ars.usda.gov).
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