chapter 3

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

the EVPI.

In decision theory terminology, a course of action or a strategy that may be chosen by a decision maker is called a. a payoff. b. an alternative. c. a state of nature. d. none of the above

an alternative.

3-2 Describe what is involved in the decision process

-2. The decision-making process includes the following steps: (1) define the problem, (2) list the alternatives, (3) identify the possible outcomes, (4) evaluate the consequences, (5) select an evaluation criterion, and (6) make the appropriate decision. The first four steps or procedures are common for all decision-making problems. Steps 5 and 6, however, depend on the decision-making model.

15. In assessing utility values, a. the worst outcome is given a utility of -1. b. the best outcome is given a utility of 0. c. the worst outcome is given a utility of 0. d. the best outcome is given a value of -1

. the worst outcome is given a utility of 0.

-1 Give an example of a good decision that you made that resulted in a bad outcome. Also give an example of a bad decision that you made that had a good outcome. Why was each decision good or bad?

3-1. The purpose of this question is to make students use a personal experience to distinguish between good and bad decisions. A good decision is based on logic and all of the available information. A bad decision is one that is not based on logic and the available information. It is possible for an unfortunate or undesirable outcome to occur after a good decision has been made. It is also possible to have a favorable or desirable outcome occur after a bad decision.

3-3 What is an alternative? What is a state of nature?

3-3. An alternative is a course of action over which we have complete control . An example of an alternative is deciding whether or not to take an umbrella to school or work on a particular day . A state of nature is an event or occurrence in which we have no control.. An example of a state of nature is whether or not it will rain on a particular day.

Discuss the differences among decision making under certainty, decision making under risk, and decision making under uncertainty.

3-4. The basic differences between decision-making models under certainty, risk, and uncertainty depend on the amount of chance or risk that is involved in the decision. A decision-making model under certainty assumes that we know with complete confidence the future outcomes. Decision-making-under-risk models assume that we do not know the outcomes for a particular decision but that we do know the probability of occurrence of those outcomes. With decision making under uncertainty, it is assumed that we do not know the outcomes that will occur, and furthermore, we do not know the probabilities that these outcomes will occur

What techniques are used to solve decision-making problems under uncertainty? Which technique results in an optimistic decision? Which technique results in a pessimistic decision

3-5. The techniques discussed in this chapter used to solve decision problems under uncertainty include maximax, maximin, equally likely, criterion of realism, and minimax regret. The maximax decision-making criterion is an optimistic decision-making criterion, while the maximin is a pessimistic decision-making criterion

Define opportunity loss. What decision-making criteria are used with an opportunity loss table?

3-6. For a given state of nature, opportunity loss is the difference between the payoff for a decision and the best possible payoff for that state of nature. It indicates how much better the payoff could have been for that state of nature. The minimax regret and the minimum expected opportunity loss are the criteria used with this

3-7 What information should be placed on a decision tree?

3-7. Alternatives, states of nature, probabilities for all states of nature and all monetary outcomes (payoffs) are placed on the decision tree. In addition, intermediate results, such as EMVs for middle branches, can be placed on the decision tree

-8 Describe how you would determine the best decision using the EMV criterion with a decision tree

3-8. Using the EMV criterion with a decision tree involves starting at the terminal branches of the tree and working toward the origin, computing expected monetary values and selecting the best alternatives. The EMVs are found by multiplying the probabilities of the states of nature by the economic consequences and summing the results for each alternative. At each decision point, the best alternative is selected.

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

a number of sequential decisions are to be made

Which of the following is a decision-making criterion that is used for decision making under risk? a. expected monetary value criterion b. Hurwicz criterion (criterion of realism) c. optimistic (maximax) criterion d. equally likely criterion

a. expected monetary value criterion

14. On a decision tree, once the tree has been drawn and the payoffs and probabilities have been placed on the 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 left and moving to the right). c. is done by starting at the top of the tree and moving down. d. is done by starting at the bottom of the tree and moving up

a. is done by working backward (starting on the right and

11. 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.

b. an EMV is calculated.

In using the criterion of realism (Hurwicz criterion), the coefficient of realism (alpha ) a. is the probability of a good state of nature. b. describes the degree of optimism of the decision maker. c. describes the degree of pessimism of the decision maker. d. is usually less than zero

b. describes the degree of optimism of the decision maker

16. If a rational person selects an alternative that does not maximize the EMV, we would expect that this alternative a. minimizes the EMV. b. maximizes the expected utility. c. minimizes the expected utility. d. has zero utility associated with each possible payoff

b. maximizes the expected utility.

The minimum EOL criterion will always result in the same decision as a. the maximax criterion. b. the minimax regret criterion. c. the maximum EMV criterion. d. the equally likely criterion

c. the maximum EMV criterion.

13. The efficiency of sample information a. is the EVSI/(maximum EMV without SI) expressed as a percentage. b. is the EVPI/EVSI expressed as a percentage. c. would be 100% if the sample information were perfect. d. is computed using only the EVPI and the maximum EMV

c. would be 100% if the sample information were perfect

Bayes' theorem is used to revise probabilities. The new (revised) probabilities are called a. prior probabilities. b. sample probabilities. c. survey probabilities. d. posterior probabilities

d. posterior probabilities

12. The EVSI a. is found by subtracting the EMV without sample information from the EMV with sample information. b. is always equal to the expected value of perfect information. c. equals the EMV with sample information assuming no cost for the information minus the EMV without sample information. d. is usually negative

equals the EMV with sample information assuming no cost for the information minus the EMV without sample information

The minimum expected opportunity loss a. is equal to the highest expected payoff. b. is greater than the expected value with perfect information. c. is equal to the expected value of perfect information. d. is computed when finding the minimax regret decision

is equal to the expected value of perfect information

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

risk.

in decision theory, probabilities are associated with a. payoffs. b. alternatives. c. states of nature. d. none of the above.

states of nature