Chapter 3. Decision analysis

Expected Opportunity Loss

expected value of the regret for each decision

Decision theory

is an analytic and systematic approach to the study of decision making

certainty, uncertainty, risk

Types of Decision-Making Environments

Minimax Regret

A criterion that minimizes the maximum opportunity loss.

a number of sequential decisions are to be made

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.

Decision Tree Analysis

A diagramming and calculation technique for evaluating the implications of a chain of multiple options in the presence of uncertainty.

Efficiency of Sample Information

A measure of how good the sample information is relative to perfect information.

Sensitivity Analysis

A quantitative risk analysis and modeling technique used to help determine which risks have the most potential impact on the project. It examines the extent to which the uncertainty of each project element affects the objective being examined when all other uncertain elements are held at their baseline values. The typical display of results is in the form of a tornado diagram.

posterior probabilities

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.

maximizes the expected utility

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.

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.

the worst outcome is given a utility of 0

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.

an alternative

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.

states of nature

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

pessimistic, maximin

In using the ____ criterion, the worst (minimum) payoff for each alternative is considered and the alternative with the best (maximum) of these is selected. Hence, this criterion is sometimes called the ____ criterion.

describes the degree of optimism of the decision maker

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.

Criterion of Realism, Hurwicz Criterion

Often called the weighted average, the ___ (the ____)is a compromise between an optimistic and a pessimistic decision

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.

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 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.

equally likely, Laplace

One criterion that uses all the payoffs for each alternative is the _____, also called _____, decision criterion. This involves finding the average payoff for each alternative, and selecting the alternative with the best or highest average.

Clearly define the problem at hand, List the possible alternatives, Identify the possible outcomes or states of nature, List the payoff of each combination of alternatives and outcomes, Select one of the mathematical decision theory models, Apply the model and make your decision

Six Steps in Decision Making

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

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.

would be 100% if the sample information were perfect.

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.

the maximum EMV criterion

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.

is equal to the expected value of perfect 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.

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 maximum EOL. d. the maximum EMV.

Expected Monetary Value criterion

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

decision making under certainty

decision makers know with certainty the consequence of every alternative or decision choice

optimistic, maximax

the best (maximum) payoff for each alternative is considered and the alternative with the best (maximum) of these is selected. Hence, the criterion is sometimes called the ____ criterion.

expected value with perfect information

the expected (average) return if perfect information is available

Expected Value of Perfect Information

the maximum value that a decision maker would be willing to pay for perfect information about future states of nature

decision making under uncertainty

there In ___, there are several possible outcomes for each alternative, and the decision maker does not know the probabilities of the various outcomes.