Discrete Approximations of Probability Distributions

Allen C. Miller, Thomas R. Rice

Management Science · 1983 · 339 citations · 0 references

Concepts

Abstract

Practical limits on the size of most probabilistic models require that probability distributions be approximated by a few representative values and associated probabilities. This paper demonstrates that methods commonly used to determine discrete approximations of probability distributions systematically underestimate the moments of the original distribution. A new procedure based on gaussian quadrature is developed in this paper. It can be used to decrease the error in the approximation to any desired level.