Loss Functions

["Doug Hensler" <Hensler@colorado.edu>]

Directing attention to loss functions rather than value functions likely =
has more to do with the risk averse nature of mankind than it has to do =
with issues of pessimism vs. optimism.  Risk assessment is a highly =
valuable enterprise in the valuation exercise and now we see whole =
departments emerging in engineering colleges and schools for the study =
and development of this topic.  This is a subset of Financial =
Engineering and these groups are sometimes partnered with Operations =
Research/Management Science groups.  Examples include the Princeton =
University School of Engineering and Applied Science and the University =
of Michigan College of Engineering.  Evaluating risk, and the associated =
expected losses, in any setting is not so much pessimistic as it is =
realistic.  That the Taguchi Loss function, or any loss function, =
estimates losses but also risk exposure is an important exercise in this =
day of consumer sophistication, warranty costs, and the value of the =
repeat customer.

Doug Hensler
W. Edwards Deming Professor of Management
University of Colorado at Boulder