MGMT 318 Test 2 Study Guide: Module A

Expected value with perfect information (EvwPI)

The expected (average) return if perfect information is available. To calculate this value, we choose the best alternative for each state of nature and multiply its payoff times the probability of occurrence of that state of nature.

A. the EVPI

The most that a person should pay for perfect information is: a) the EVPI b) the maximum EMV minus the minimum EMV. c) the minimum EMV. d) the maximum EMV.

alternatives

What are listed down the left side of a decision table?

square

What decision tree symbol represents a decision node?

circle

What decision tree symbol represents a state of nature mode?

payoff table

What is an alternative name for a decision table?

Alternative

a course of action or strategy that may be chosen by a decision maker (e.g. not carrying an umbrella tomorrow).

Decision Making Under Certainty

when there is complete uncertainty as to which state of nature in a decision environment may occur. (when we cannot even assess probabilities for each possible outcome)

C. risk

If probabilities are available to the decision maker, then the decision- making environment is called: a) certainty b) uncertainty c) risk d) none of the above

B. alternative

In decision table terminology, a course of action or a strategy that may be chosen by a decision maker is called a(n): a) payoff b) alternative c) state-of-nature d) all of the above

1. consequence 2. outcome 3. conditional

For any alternative and a particular state of nature, there is a _________ or ________, which is usually expressed as a monetary value. This is called a _____ value.

True

True/False: When a sequence of decisions must be made, decision trees are much more powerful tools than are decision tables.

states of nature

What are listed across the top of a decision table?

EVwPI - Maximum EMV

How much money should a firm be willing to spend to obtain a perfect market forecast?

Equally likely

A criterion that assigns equal probability to each state of nature and finds the alternative with the highest average outcome.

Maximax ("optimistic")

A criterion that finds an alternative that maximizes the maximum outcome.

Maximin ("pessimistic")

A criterion that finds an alternative that maximizes the minimum outcome.

A. a number of the sequential decisions are to be made.

A decision tree is preferable to a decision table when: a) a number of the sequential decisions are to be made. b) probabilities are available. c) the maximax criterion is used. d) the objective is to maximize regret.

are sequential decisions and states of nature.

A decision tree should be used in lieu of a decision table when there

Decision Tree

A graphic display of the decision process that indicates decision alternatives, states of nature and their and their respective probabilities, and payoffs for each combination of decision alternative and state of nature.

Symbol used in a decision tree: circle

A state of nature node, out of which one state of nature will occur.

State of Nature

An occurence or a situation over which the decision maker has little or no control (e.g. tomorrows weather).

Symbol used in a decision tree: square

Decision Node, from which one of the several alternatives may be selected.

Decision Tree

Decisions that lend themselves to display in a decision table also lend themselves to display in a _____.

B. an EMV is calculated

On a decision tree, at each state-of-nature node: a) the alternative with the greatest EMV is selected. b) an EMV is calculated. c) all probabilities are added together. d) the branch with the highest probability is selected.

A. is done by working backward (starting on the right and moving to the left.)

On a decision tree, once the tree has been drawn and the payoffs and probabilities have been placed on a tree, the analysis (computing EMVs and selecting the best alternative): a) is done by working backward (starting on the right and moving to the left.) b) is done by working forward (starting on the right and moving to the left). c) is done by starting at the top of the trees and moving down. d) is done by starting at the bottom of the tree and moving up.

Expected Value of Perfect Information (EVPI)

The difference between the payoff under perfect information and the payoff under risk.

Expected Monetary Value (EMV)

The expected payout or value of a variable that has different possible states of nature, each with an associated probability.

decision tables and decision trees

The text presents which two analytic tools to help with decision making?

B. decision tables and decision trees.

The text presents which two analytic tools to help with decision making? a) decision networks and decision trees. b) decision tables and decision trees. c) decision networks and decision derivations. d) decision tables and decision networks.

circle

What decision tree symbol represents a state-of-nature node?

alternative

What is a course of action or strategy that may be chosen by a decision maker?

decision tree

What is a graphical means of analyzing decision alternatives and states of nature?

decision table

What is a tabular means of analyzing decision alternatives and states of nature?

state of nature

What is an occurrence or a situation over which the decision maker has little or no control?

expected value with perfect information

What is the average return under complete certainty? a. expected value with perfect information b. expected monetary value c. expected value of perfect information d. maximum expected monetary value

EMV

What is the most common used criterion for decision tree analysis?

maximin

Which decision making rule is known as a "pessimistic" decision criterion?

c. develop specific and measurable objectives.

Which of the following comes EARLIEST in the decision- making process? a. develop a model b. Evaluate each alternative solution based on its merits and drawbacks. c. develop specific and measurable objectives. d. Implement and evaluate the decision and then set a timetable for completion.

B. Estimate payoffs for each possible combination of decision alternatives and states of nature.

Which of the following is the 4th step in analyzing problems with decision trees? a. Assign probabilities to the states of nature b. Estimate payoffs for each possible combination of decision alternatives and states of nature. c. Structure or draw the decision tree. d. Solve the problem by computing the EMV for each state of nature node.

Select the best alternative

Which of the following is the 5th step in the decision making process?

D. Select the best alternative

Which of the following is the 5th step in the decision-making process? a. Implement and evaluate the decisions and then set timetable for completion. b. develop specific and measurable objectives. c. evaluate each alternative solution based on its merits and drawbacks. d. Select the best alternative.

C. a model

Within decision-making theory, what is a relationship between objectives and variables? a. a link b. a path c. a model d. a match

Expected Monetary Value (EMV)

_________ is the most commonly used criterion for decision tree analysis.

Decision Making Under Risk

relies on probabilities. Several possible states of nature may occur, each with an assumed probability. The states of nature must be mutually exclusive and collectively exhaustive and their probabilities must sum to 1.