Ch 5s- Decision Theory LearnSmart

Calculating the expected gain due to delaying a decision results in the ______.

Correct Answer: expected value of perfect information

Minimum expected regret is another way of calculating ______.

Correct Answer: expected value of perfect information

The expected monetary value approach is most appropriate when a decision maker is ______.

Correct Answer: risk neutral

Decision trees are particularly useful for analyzing situations that have ______ decisions.

Correct Answer: sequential

Which decision environment exists in this scenario? A new product has a profit of 50 cents per item. As it is a new product, unit demand is unknown.

Correct Answer: uncertainty

Place the steps to a decision theory approach in the correct order from first to last.

1. Identify the possible future conditions 2. develop a list of possible alternatives 3. determine or estimate the payoff associated with each alternative 4. if possible estimate the likelihood of each possible future condition. 5. evaluate alternatives according to some decision criterion, and select the best

The decision process consists of the following steps. Place them in the correct order from the first step to the last.

1. Identify the problem. 2. specify objectives and criteria for a solution 3. develop suitable alternatives. 4. analyze and compare alternatives 5. select the best alternative 6. implement the solution 7. monitor to see that the desired result is achieved.

______ provides a range of probability over which the choice of alternatives would remain the same.

Correct Answer: Sensitivity analysis

Which action is likely to lead to a poor outcome in the decision-making process?

Correct Answer: Skipping a step in the process

How is the expected value of perfect information (EVPI) calculated?

Correct Answer: Subtract expected payoff under risk from expected payoff under certainty

What is the expected monetary value criterion?

Correct Answer: The best expected value among the alternatives.

True or false: Making a decision under certainty is straightforward.

Correct Answer: True

The result of different departments each attempting to reach a solution that is optimum for that department.

Correct Answer Suboptimization

Decisions that lend themselves to a decision theory approach tend to have which of the following elements? Check all that apply.

Correct Answer: A list of alternatives for the manager to choose from. A known payoff for each alternative under each possible future condition. A set of possible future conditions that will have a bearing on the results of the decision.

What are the two axes of a payoff table? Check both.

Correct Answer: Alternatives Possible states of nature

The limitations on decision making caused by costs, human abilities, time, technology, and availability of information.

Correct Answer: Bounded rationality

Which decision environment is characterized by knowing the values of all relevant parameters?

Correct Answer: Certainty

In a decision tree, what does a circular node represent?

Correct Answer: Chance events

How are decisions made under certainty?

Correct Answer: Choose the alternative that has the best payoff under that state of nature.

In a decision tree, what does a square node represent?

Correct Answer: Decision points

What is a schematic representation of the available alternatives and their possible consequences?

Correct Answer: Decision trees

There are two ways to determine the expected value of perfect information (EVPI). What are they? Check both.

Correct Answer: EVPI = Expected payoff under uncertainty - Expected payoff under risk Minimum expected regret

True or false: Sensitivity analysis tells us which outcome is more sensitive to change.

Correct Answer: False

Which of the following is not a cause of failure in the decision making process?

Correct Answer: Having suitable alternatives

Which of the following is not a cause of poor decisions in the decision process?

Correct Answer: Identifying prior negative results

In a decision-making environment with uncertainty, what is the alternative with the best average payoff of any of the alternatives?

Correct Answer: Laplace

In a decision-making environment with uncertainty, what is the alternative with the best possible payoff?

Correct Answer: Maximax

In decision theory, what shows the expected payoffs for each alternative in every possible state of nature?

Correct Answer: Payoff table

Which decision environment exists in this scenario? A customer estimates a 25 percent chance of needing 50 items, a 25 percent chance of needing 60 items and a 50 percent chance of needing 100 items.

Correct Answer: Risk

Which decision environment is characterized by probabilities attached to potential future events?

Correct Answer: Risk