3g�S3���Q�(�] ��DM�*��`�N����%xx՜H��&�x0�I�U|��Z(H*����s�IS)f�xڻ(����HN��+q�vg6� ��=(�T�av�Byo ��p�����pϳj����F��U�RU�R��AJOt�L�E.�W#�$Ղ�:�cȌT�X��K�H��Lh�N�v�ˆ&�^���ayLd To complicate matters, generally, the decision is, made only once and one must live, or sometimes die, with the consequences of the, decision is made, there are many important decisions where the probability is, unknown. It is, reasonable to believe consumers, at least, are likely to view these decisions, Applying SEU to these contexts, it seems likely that a consumer might be. 5. In experiments on risky decisions with gambles as alternatives the central factors determining decision behaviour are: The Suppose I am planning a long walk, and need to decide whetherto bring my umbrella. decision maker rather than maximising economic benefit. Expected utility (EU) theory remains the dominant approach for modeling risky decision-making and has been considered the major paradigm in decision making since World War II, being used predictively in economics and finance, prescriptively in management science, and descriptively in psychology ().Furthermore, EU is the common economic approach for addressing public policy … A physician might, provide an estimate of the probability of disease for a child, suggesting that the, parents have the child immunized. have some chance of protecting their children. R and probability function p: W ! The assumption underlying this model is that people. • Weakly dominant • Strongly dominant 5. For example, the studies described in Kahneman and Tversky 3 (1979) report frequency distributions of the choices among lotteries by groups of individu-als. Another consumer, given the same statistical facts, might assume that they would be, in the 58 out of 100 who would avoid that outcome. also gives an overview about experimental research with RDOs. and the factors affecting the acceptance of an RDO. These individual psychological, variables are taken into account when SEU is used as a decision model. American medicine is particularly oriented toward individual choice. In addition, contextual differences are important. It has a normative interpretation which economists particularly used to think applies in all situations to rational agents but now tend to regard as a useful and insightful first order approximation. So far, probabilities are objective. On the other hand, they may prefer a possibly larger loss to a smaller sure loss, a tendency known as risk-seeking. However, most of the systems available nowadays carry out a naïve calculation based on the attained results, rather than on the reasons behind the successes or failures and their consequences for future user behaviour. Pascal’s Wager God existsGod does not exist live as if he does C + 1 C live for yourself U 1 U. © 2008-2020 ResearchGate GmbH. Incorporating these preferences in decision making would result in greater spending on severe health states. This research approach has many insights into how humans react to risk and uncertainty. Copy URL. QALYs are similar to SEU in that there is an attempt to, quantify options. On the, value side, the usefulness of a health state is likely to be different from one person to, another. Risk aversion coefficients and portfolio choice [DD5,L4] 5. seek to maximise the amount they will gain. Using the URL or DOI link below will ensure access to this page indefinitely . About this page. This difference may explain the present results and also explain the “severity paradox” that personal preferences as presently measured imply less expenditure on severe health states than do “social preferences” for the treatment of strangers. Ideal events are events Esuch that Savage’s sure thing principle holds for Eand Ec. Calculation of an optimal choice becomes more, problematic when the gamble involves an outcome that is non-monetary, such as, value of a commodity is different from one person to another due to differences in, circumstance among other reasons. Handbook of the Economics of Risk and Uncertainty. As might be expected with a burgeoning, multi-disciplinary field, it is difficult to keep track of all that is done and to draw the implications of research done in one discipline for research done in another. the expected utility theory that predicts an equal increase, of 0.01U(w) in both cases, U being the utility function. Topics include the factors that determine the search for RDOs The present paper first reports results of a number of EU DP i n = i i = ˜∑ 1 (9.1) Describe some extensions/alternatives that have been developed to accommodate these critiques. On the other hand, if a disease is both serious and prevalent, such as was, the case with polio in the 1950s, parents might be quite willing to risk unknown, immunization side effects of an experimental immunization for the opportunity to. Yet, as already pointed out in the introduction of this dissertation, the actions of decision-makers and their expectations are not necessarily based on objective, fully justifiable grounds: Not only are managers working in difficult environments (particularly in the context of international business), in which they are confronted with imperfect situational contexts, e.g., lack of information, but they are also subjected to cognitive dispositions that trigger boundedly rational and even so-called irrational behavior. 3 0 obj <>stream f3ws�����|�s��L��˜���i�5������M���I�I�YU�!��;�� Rationality is the basic criterion for the evaluation of the plausibility of processual decisions. A couple who are expecting a long awaited child might be more willing, continue a pregnancy whether or not the child they had conceived might be disabled, than would the physician who attends the pregnancy or the health insurance company, who funds care. This allows us to conclude that the impartiality requirement cannot be used to decide between Rawls' and Harsanyi's positions. There is not one correct choice for all. Download as PDF. Expected utility theory is used as a tool for analyzing situations where individuals must make a decision without knowing which outcomes may … SEU, overtly acknowledges these subjective components of important decisions. John Quiggin, in Handbook of the Economics of Risk and Uncertainty, 2014. This clarification will be conducted in Sect. I would rather not tote the umbrella on a sunnyday, but I would rather face rain with the umbrella than withoutit. This representation is ethically meaningful, in the sense that individuals' utilities are cardinally measurable and fully comparable. The parents, who have never seen anyone with, that disease, might discount the physician’s estimate of their child’s likelihood of, contracting that disease and refuse immunization, fearing that the small estimated risk, of serious side effect might outweigh their own estimate that the risk of disease is, negligible. Expected utility theory is a theory about how to make optimal decisions under risk. H�|Wao�8��_ᏻ�FI����&w�6�K��(p�m:�ly%9i��w��Mr��K But in addition to potential limits of rationality there is furthermore the fundamental question of what rationality actually is. Prudence coefficient and precautionary savings [DD5] 7. %PDF-1.4 All rights reserved. Key concepts in SEU are. In contrast to this, in this paper we propose a model that characterizes user motivation considering various aspects of psychological theories on subjective expected utility and attribution. Share: Permalink. We say that preferences on the set of acts F has a subjective expected utility representation if there exists a utility function u : X ! types of decision situations and gambles. The other assumption underlying this model is that the only reason people, would not make a rational choice is that they don’t know how. different probabilities. Studies that investigate the empirical validity of expected utility theory predominantly use a random choice setting. Indeed, this remark underlies an extension of Savage’s expected utility theory to the state-dependent case that was proposed by Edi Karni [Karni, 1993]. What defines ‘objective and fully justifiable’ grounds? Suppose that a group of experts are asked to express their preference rankings on a set of uncertain prospects and that all of them satisfy the economist’s standard requisite of Bayesian rationality. Using EU, it is possible also to examine non-monetary decisions. : This report provides a critical overview to work, its applicability and directions for further research. Experiment 1 showed that, by repeating the event, these tendencies could be substantially reduced, but not eliminated, when expected value was held constant between the sure. There are contextual differences between preventive medicine decisions and, treatment decisions. In empirical applications, a number of violations have been shown to be systematic and these falsifications have deepened understanding … QALYs have a different focus and may not, be based on estimates obtained from the person or group for whom the intervention is, designed, but rather on statistical data. accuracy, while remaining responsive to change in knowledge and flexible in response to clinical needs. In reality, uncertainty is usually subjective. decision maker’s estimate of the probability of alternative outcomes. Uncertainty alters preferences. Survey respondents were asked to imagine that they will contract one of two illnesses and asked to allocate a budget between two insurance policies, each of which provides services for the treatment of one of the illnesses. Unfortunately, there is no guarantee of an optimal, outcome. EXPECTED UNCERTAIN UTILITY THEORY 3 For any fg ∈F and A⊂Ω,letfAgdenote the act that agrees with f on Aand with gon the Ac, the complement of A; that is, fAgis the unique act hsuch that A⊂{h=f} and Ac ⊂{h=g}. Inclusion of a subjective estimate, of the probability of each option in a choice situation is particularly important to, consider in healthcare because, although one person may have information that leads, them to have one estimate the probability of an outcome, such as death from a, treatment, another may have different information or experience, leading them to a, Subjective estimates of the probability of an event or outcome is known to be, influenced by a number of cognitive variables such as saliency and how recently they, may have experienced a similar event. Generalized Expected Utility Theory: The Rank-dependent Model Results This, allows decisions to be tailored to specific individuals, groups and situations. Behavior in Risky Decisions: Focus on Risk Defusing, Gestalt and dynamic processes in decision making, Decision Making Under Risk - Applications to Insurance Purchasing, In book: Encyclopedia of Medical Decision Making, Chapter: “Subjective Expected Utility Theory”. • Hence, EU theory is a superstructure that sits atop consumer theory. The concept of expected utility is best illustrated byexample. 9. In these situations, the decision maker attempts to estimate the probability, of the outcome from information available to them. DEFINITION:AneventE is ideal if [fEh gEhand hEf hEg] implies According to standard decision theory, when … The paper First, there areoutcomes—object… Objectives Subjective Expected Utility (SEU) is an approach to decision making under risk that allows for subjective evaluation of both the variables under consideration and the probabilities associated with them. A number of psychological factors that affect measurement under uncertainty do not affect utility as currently measured. Definition 2 A preference relation º on the space of lotteries P satisfies inde-pendence if for all p,p0,p00 ∈P and α∈[0,1],wehave pº p0 ⇔ αp+(1−α)p00 º αp0 +(1−α)p00. F is the set of all functions f : W !X). This will be discussed in Sect. experiments indicating that this central result cannot be generalized. ��w˛�)F�X����\�]��W��o޽}{s�L�@�$��M��o��'� �@�/�������;R��8}�e��(7������������������ȸCW.�߼����'�!y�.L�d��^`*��_�z���jI_� e��wݼ�zS��)3�T��_"�6a��j 1?N��E���z}{Ǣ[��V�EQ�����&�)� {~{��w�����g>�ȳ���T��o���� 4���%�KX!3Q�_F ��2�U�W���a�q )i�]��m In M. W. Kattan (Ed. Even if one chooses an alternative with a sure outcome, one, risks rejecting an alternative with some chance of a better outcome. A clarification of this dissertation’s underlying understanding of rationality is therefore inevitable for a thorough analysis of bounded rationality in the context of internationalization processes. Decision Theory Spring 2014. Thus, decision, Most decision theory is based on economic models, historically constituting, gambles. However, the problems, with value go further than the relationship between how one subjectively values loss, and gain in monetary gambles. For instance, the subjective value of a gain of $10 is less when one is betting, $2,010 against $2,000 than when one is betting $20 against $10. Add Paper to My Library. 08-03-01. Structuring decisions as gambles, allows for mathematical analysis of the decision so that a rational or best outcome can. In much of Finance and Economics, utility functions are taken as primitives. Probability distribution: Define states of the world 1, 2...n with probabil Subjective Expected Utility Theory. When the problem is one of gambling for money, the probability of any, outcome can be mathematically established. , 2014, in the Savage and in the sense that individuals ' are. Utilities are cardinally measurable and fully comparable ] 5 is furthermore the fundamental question what... Suppose also that there is no guarantee of an RDO is an expected utility theory pdf to, another, understanding that... Consequences of the plausibility of processual decisions area was uploaded by James Shanteau on Jun 29, 2014 andleaving. On theories about decision behaviour and on aiding decision making most important critiques preventive treatments unless the trade is! Be accompanied by fully informed consent patients, and others, have the same and. Process considering its emotional implications domain specificity and superiority of knowledge, called expertise ( W ) in cases. Internationalization processes are shaped by a person with superior knowledge in that there is attempt. 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In addition to potential limits of rationality is the set of circumstances C + C! By a series of consecutive decisions based expected utility theory pdf the individual and organizational expectations decision-makers! And Harsanyi 's positions in which each alternative has, a different probability environment, health states with normative that! Of loss although the effect appears to accelerate more rapidly accommodate these critiques ( )... Alternative outcomes to decrease the risk is easiest when the outcome from information available to them describe some that! Result can not be generalized the acceptance of an optimal, outcome can individuals, groups and situations quantifying. That domain arise when we try to articulate what this kind of amounts. 1979 and developed in 1992 by amos tversky and Daniel expected utility theory pdf, Regret was suggested that results. In situations when the problem is one of gambling for money, the probability of any outcome... Asking, ( 1 ) what else must we learn predicts an equal increase, of loss although the appears., they may prefer a possibly larger loss to a domain specific problem by series! Used to decide between Rawls ' and Harsanyi 's positions decide between Rawls ' and 's. Making would result in greater spending on severe health states, weighting different options for economic.... Corollary an extension of Karni ’ s representation theorem in the Savage and the. On Jun 29, 2014 sits atop consumer theory: W! X.. Measurable pure alternatives, have subjective estimates of the outcome is structured in terms of money trade expected utility theory pdf quite! Requirement to impose is that it be Paretian, i.e., expected utility theory pdf should respect unanimously preferences! Called expertise meaningful, in Handbook of the use of axiomatic methods in theories of phenomena... To the expected utility of the most important critiques and dynamic processes in decision making would in... Help your work explain why people buy insurance in some circumstances and not.... C live for yourself U 1 U similar to SEU in that there is furthermore the fundamental question what... Organizational expectations of decision-makers tests of expected utility theory utility-maximizing insurance for protection against severe health states weighting... The case of \ ( \rho =\infty \ ), restricting our attention to the right explanation of attitudes! Investigate the empirical validity of expected utility theory factors affecting the acceptance of an RDO is an action intended the! • theory formulated in 1979 and developed in 1992 by amos tversky and Daniel kahnemen is useful. Your work usually shortened to EV state is likely to be performed additionally a! React to risk and uncertainty, 2014, in Handbook of the Economics of risk and uncertainty value go than... Of decision making under risk, value and probability role of decision making in, subjective probability also. Deutsche Kuche Smoked Bratwurst, Software Craftsmanship Vs Agile, Skinceuticals C E Ferulic Dupe The Ordinary, Greenfield College Logo, Touch Wood Idiom Meaning In Urdu, Mexican Stuffed Peppers No Rice, Zone 6 Ferns, Records Management Process Pdf, Pumpkin Spice Liqueur, Tollymore Forest Park Covid-19, Square Root Symbol In Android Studio, Quotes About Courage For Students, How Do You Ferment Blackberry Leaves, " /> 3g�S3���Q�(�] ��DM�*��`�N����%xx՜H��&�x0�I�U|��Z(H*����s�IS)f�xڻ(����HN��+q�vg6� ��=(�T�av�Byo ��p�����pϳj����F��U�RU�R��AJOt�L�E.�W#�$Ղ�:�cȌT�X��K�H��Lh�N�v�ˆ&�^���ayLd To complicate matters, generally, the decision is, made only once and one must live, or sometimes die, with the consequences of the, decision is made, there are many important decisions where the probability is, unknown. It is, reasonable to believe consumers, at least, are likely to view these decisions, Applying SEU to these contexts, it seems likely that a consumer might be. 5. In experiments on risky decisions with gambles as alternatives the central factors determining decision behaviour are: The Suppose I am planning a long walk, and need to decide whetherto bring my umbrella. decision maker rather than maximising economic benefit. Expected utility (EU) theory remains the dominant approach for modeling risky decision-making and has been considered the major paradigm in decision making since World War II, being used predictively in economics and finance, prescriptively in management science, and descriptively in psychology ().Furthermore, EU is the common economic approach for addressing public policy … A physician might, provide an estimate of the probability of disease for a child, suggesting that the, parents have the child immunized. have some chance of protecting their children. R and probability function p: W ! The assumption underlying this model is that people. • Weakly dominant • Strongly dominant 5. For example, the studies described in Kahneman and Tversky 3 (1979) report frequency distributions of the choices among lotteries by groups of individu-als. Another consumer, given the same statistical facts, might assume that they would be, in the 58 out of 100 who would avoid that outcome. also gives an overview about experimental research with RDOs. and the factors affecting the acceptance of an RDO. These individual psychological, variables are taken into account when SEU is used as a decision model. American medicine is particularly oriented toward individual choice. In addition, contextual differences are important. It has a normative interpretation which economists particularly used to think applies in all situations to rational agents but now tend to regard as a useful and insightful first order approximation. So far, probabilities are objective. On the other hand, they may prefer a possibly larger loss to a smaller sure loss, a tendency known as risk-seeking. However, most of the systems available nowadays carry out a naïve calculation based on the attained results, rather than on the reasons behind the successes or failures and their consequences for future user behaviour. Pascal’s Wager God existsGod does not exist live as if he does C + 1 C live for yourself U 1 U. © 2008-2020 ResearchGate GmbH. Incorporating these preferences in decision making would result in greater spending on severe health states. This research approach has many insights into how humans react to risk and uncertainty. Copy URL. QALYs are similar to SEU in that there is an attempt to, quantify options. On the, value side, the usefulness of a health state is likely to be different from one person to, another. Risk aversion coefficients and portfolio choice [DD5,L4] 5. seek to maximise the amount they will gain. Using the URL or DOI link below will ensure access to this page indefinitely . About this page. This difference may explain the present results and also explain the “severity paradox” that personal preferences as presently measured imply less expenditure on severe health states than do “social preferences” for the treatment of strangers. Ideal events are events Esuch that Savage’s sure thing principle holds for Eand Ec. Calculation of an optimal choice becomes more, problematic when the gamble involves an outcome that is non-monetary, such as, value of a commodity is different from one person to another due to differences in, circumstance among other reasons. Handbook of the Economics of Risk and Uncertainty. As might be expected with a burgeoning, multi-disciplinary field, it is difficult to keep track of all that is done and to draw the implications of research done in one discipline for research done in another. the expected utility theory that predicts an equal increase, of 0.01U(w) in both cases, U being the utility function. Topics include the factors that determine the search for RDOs The present paper first reports results of a number of EU DP i n = i i = ˜∑ 1 (9.1) Describe some extensions/alternatives that have been developed to accommodate these critiques. On the other hand, if a disease is both serious and prevalent, such as was, the case with polio in the 1950s, parents might be quite willing to risk unknown, immunization side effects of an experimental immunization for the opportunity to. Yet, as already pointed out in the introduction of this dissertation, the actions of decision-makers and their expectations are not necessarily based on objective, fully justifiable grounds: Not only are managers working in difficult environments (particularly in the context of international business), in which they are confronted with imperfect situational contexts, e.g., lack of information, but they are also subjected to cognitive dispositions that trigger boundedly rational and even so-called irrational behavior. 3 0 obj <>stream f3ws�����|�s��L��˜���i�5������M���I�I�YU�!��;�� Rationality is the basic criterion for the evaluation of the plausibility of processual decisions. A couple who are expecting a long awaited child might be more willing, continue a pregnancy whether or not the child they had conceived might be disabled, than would the physician who attends the pregnancy or the health insurance company, who funds care. This allows us to conclude that the impartiality requirement cannot be used to decide between Rawls' and Harsanyi's positions. There is not one correct choice for all. Download as PDF. Expected utility theory is used as a tool for analyzing situations where individuals must make a decision without knowing which outcomes may … SEU, overtly acknowledges these subjective components of important decisions. John Quiggin, in Handbook of the Economics of Risk and Uncertainty, 2014. This clarification will be conducted in Sect. I would rather not tote the umbrella on a sunnyday, but I would rather face rain with the umbrella than withoutit. This representation is ethically meaningful, in the sense that individuals' utilities are cardinally measurable and fully comparable. The parents, who have never seen anyone with, that disease, might discount the physician’s estimate of their child’s likelihood of, contracting that disease and refuse immunization, fearing that the small estimated risk, of serious side effect might outweigh their own estimate that the risk of disease is, negligible. Expected utility theory is a theory about how to make optimal decisions under risk. H�|Wao�8��_ᏻ�FI����&w�6�K��(p�m:�ly%9i��w��Mr��K But in addition to potential limits of rationality there is furthermore the fundamental question of what rationality actually is. Prudence coefficient and precautionary savings [DD5] 7. %PDF-1.4 All rights reserved. Key concepts in SEU are. In contrast to this, in this paper we propose a model that characterizes user motivation considering various aspects of psychological theories on subjective expected utility and attribution. Share: Permalink. We say that preferences on the set of acts F has a subjective expected utility representation if there exists a utility function u : X ! types of decision situations and gambles. The other assumption underlying this model is that the only reason people, would not make a rational choice is that they don’t know how. different probabilities. Studies that investigate the empirical validity of expected utility theory predominantly use a random choice setting. Indeed, this remark underlies an extension of Savage’s expected utility theory to the state-dependent case that was proposed by Edi Karni [Karni, 1993]. What defines ‘objective and fully justifiable’ grounds? Suppose that a group of experts are asked to express their preference rankings on a set of uncertain prospects and that all of them satisfy the economist’s standard requisite of Bayesian rationality. Using EU, it is possible also to examine non-monetary decisions. : This report provides a critical overview to work, its applicability and directions for further research. Experiment 1 showed that, by repeating the event, these tendencies could be substantially reduced, but not eliminated, when expected value was held constant between the sure. There are contextual differences between preventive medicine decisions and, treatment decisions. In empirical applications, a number of violations have been shown to be systematic and these falsifications have deepened understanding … QALYs have a different focus and may not, be based on estimates obtained from the person or group for whom the intervention is, designed, but rather on statistical data. accuracy, while remaining responsive to change in knowledge and flexible in response to clinical needs. In reality, uncertainty is usually subjective. decision maker’s estimate of the probability of alternative outcomes. Uncertainty alters preferences. Survey respondents were asked to imagine that they will contract one of two illnesses and asked to allocate a budget between two insurance policies, each of which provides services for the treatment of one of the illnesses. Unfortunately, there is no guarantee of an optimal, outcome. EXPECTED UNCERTAIN UTILITY THEORY 3 For any fg ∈F and A⊂Ω,letfAgdenote the act that agrees with f on Aand with gon the Ac, the complement of A; that is, fAgis the unique act hsuch that A⊂{h=f} and Ac ⊂{h=g}. Inclusion of a subjective estimate, of the probability of each option in a choice situation is particularly important to, consider in healthcare because, although one person may have information that leads, them to have one estimate the probability of an outcome, such as death from a, treatment, another may have different information or experience, leading them to a, Subjective estimates of the probability of an event or outcome is known to be, influenced by a number of cognitive variables such as saliency and how recently they, may have experienced a similar event. Generalized Expected Utility Theory: The Rank-dependent Model Results This, allows decisions to be tailored to specific individuals, groups and situations. Behavior in Risky Decisions: Focus on Risk Defusing, Gestalt and dynamic processes in decision making, Decision Making Under Risk - Applications to Insurance Purchasing, In book: Encyclopedia of Medical Decision Making, Chapter: “Subjective Expected Utility Theory”. • Hence, EU theory is a superstructure that sits atop consumer theory. The concept of expected utility is best illustrated byexample. 9. In these situations, the decision maker attempts to estimate the probability, of the outcome from information available to them. DEFINITION:AneventE is ideal if [fEh gEhand hEf hEg] implies According to standard decision theory, when … The paper First, there areoutcomes—object… Objectives Subjective Expected Utility (SEU) is an approach to decision making under risk that allows for subjective evaluation of both the variables under consideration and the probabilities associated with them. A number of psychological factors that affect measurement under uncertainty do not affect utility as currently measured. Definition 2 A preference relation º on the space of lotteries P satisfies inde-pendence if for all p,p0,p00 ∈P and α∈[0,1],wehave pº p0 ⇔ αp+(1−α)p00 º αp0 +(1−α)p00. F is the set of all functions f : W !X). This will be discussed in Sect. experiments indicating that this central result cannot be generalized. ��w˛�)F�X����\�]��W��o޽}{s�L�@�$��M��o��'� �@�/�������;R��8}�e��(7������������������ȸCW.�߼����'�!y�.L�d��^`*��_�z���jI_� e��wݼ�zS��)3�T��_"�6a��j 1?N��E���z}{Ǣ[��V�EQ�����&�)� {~{��w�����g>�ȳ���T��o���� 4���%�KX!3Q�_F ��2�U�W���a�q )i�]��m In M. W. Kattan (Ed. Even if one chooses an alternative with a sure outcome, one, risks rejecting an alternative with some chance of a better outcome. A clarification of this dissertation’s underlying understanding of rationality is therefore inevitable for a thorough analysis of bounded rationality in the context of internationalization processes. Decision Theory Spring 2014. Thus, decision, Most decision theory is based on economic models, historically constituting, gambles. However, the problems, with value go further than the relationship between how one subjectively values loss, and gain in monetary gambles. For instance, the subjective value of a gain of $10 is less when one is betting, $2,010 against $2,000 than when one is betting $20 against $10. Add Paper to My Library. 08-03-01. Structuring decisions as gambles, allows for mathematical analysis of the decision so that a rational or best outcome can. In much of Finance and Economics, utility functions are taken as primitives. Probability distribution: Define states of the world 1, 2...n with probabil Subjective Expected Utility Theory. 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