BUS104 CH13

Risk analysis helps the decision maker recognized the difference between:

- the expected value of a decision alternative - the payoff that might actually occur

The efficiency of sample information is

EVSI/EVPI * (100%)

A payoff

Exists for each pair of decision alternatives and states of natures can be expressed in term of PROFIT, COST, TIME, DISTANCE or any other appropriate measure

Which of the methods for decision making without probabilities best protects the decision maker from undesirable results?

The conservative approach

Decision tree probabilities refer to

The probability of an uncertain event occuring

A decision strategy is a sequence of decisions and chance outcomes, where the decisions chosen depend on the yet to be determined outcomes of chance events.

True

After all probabilities and payoffs are placed on decision tree, the decision maker calculates expected values at state of nature nodes and makes selections at decision nodes.

True

Circular nodes in a decision tree indicate that it would be incorrect to choose a path from the node.

True

EVPI >= EVSI

True

EVPI equals the expected regret associated with the minimax decision.

True

Expected value is the sum of the weighted payoff possibilities at a circular node in a decision tree.

True

Risk analysis helps the decision maker recognize the difference between the expected value of a decision alternative and the payoff that may actually occur.

True

Sample information with an efficiency rating of 100% is perfect information.

True

Square nodes in a decision tree indicate that a decision must be made.

True

States of nature should be defined so that one only one will actually occur.

True

To find the EVSI

Use prior and sample information probabilities to calculate revised probabilities

Optimistic (maximax) approach

evaluates each decision alternative in terms of the best payoff that can occur the decision with the largest possible payoff is chosen if the table in term of costs, the decision with the lowest cost would be chosen

Conservative (maximin) approach

evaluates each decision alternative in terms of the worst pay- off that can occur the minimum possible payoff is maximized (lớn nhất của minimum) the maximum possible cost is minimized (nhỏ nhất của maximum)

expected value approach

it happens if probabilistic information regarding the states of nature is available the expected return for each decision is calculated by SUMMING the PRODUCTS of the payoff under each state of nature and the probability of the respective state of nature the decision yielding the BEST EXPECTED RETURN is chosen

risk profile for a decision alternative

shows the possible payoffs for the decision alternative along with their associated probabilities

Decision Alternatives

the different possible strategies the decision maker can employ (Options available to the decision maker.)

States of Natures

the future events, not under the control of the decision maker which may occur. This should be defined so that they are mutually exclusive and collectively exhaustive (The possible outcomes for chance events that affect the payoff associated with a decision alternative.)

expected value of perfect information (EVPI)

the increase in the expected profit that would result if one knew with certainty which state of nature could occur it provides an UPPER BOUND ON THE EXPECTED VALUE OF ANY SAMPLE IR SURVEY INFORMATION

Making a good decision (A decision problem is characterized by)

Requires a clear understanding of decision alternatives, states of nature, and payoffs

Decision Analysis

- used to develop an optimal strategy when a decision maker is faced with SEVERAL DECISION ALTERNATIVES and AN UNCERTAIN OR RISK-FILLED PATTERN OF FUTURE - though a careful decision analysis has been conducted, the uncertain future events make the final consequence UNCERTAIN - the risk associated with any decision alternative is a direct result of the uncertainty associated with the final consequence

If P(high) = .3, P(low) = .7, P(favorable | high) = .9 and P(unfavorable | low) = .6 then P(favorable) =

.55

The options from which a decision maker chooses a course of action are

Called the decision alternatives, Under the control of the decision maker, and not the same as the states of nature

States of nature

Can describe uncontrollable natural events such as floods or freezing temperatures

Sensitivity analysis considers

Changes in the values of the payoffs

Decision alternatives are structured so that several could occur simultaneously.

False

The expected value of an alternative can never be negative.

False

Risk analysis

Good decision analysis include THIS that provides probability information about the favorable as well as the unfavorable consequence may occur

For a maximization problem, the conservative approach is often referred to as the

Maximin appoarch

A decision tree

a chronological representation of the decision problem round nodes = states of nature square nodes = decision alternatives

Influence diagram

a graphical device showing the relationships among the decisions, the chance events, and the consequence Squares/ rectangles depict decision nodes Circles/Ovals depict chance nodes Diamonds depict consequence nodes

Payoff table

a table showing payoffs for all combinations of DECISION ALTERNATIVES and STATES OF NATURE

Sensitivity analysis

can be used to determine how changes to the following inputs affect the recommended decision alternatives: - probabilities for the states of nature - values of the payoffs if a small change in the value of one of the inputs causes a change in the recommended decision alternative, extra effort and care should be taken in estimating the input value

minimax regret approach

requires the construction of a regret table or an opportunity loss table the decision chosen is the one correspoding the the MINIMIN OF THE MAXIMUM REGRETS