Decision Analysis

What are three characteristics of Decision Problems?

1) alternatives available 2) criteria in a decision problem 3) states of nature

Three steps of Decision Problems are:

1) decisions 2) alternatives 3) outcomes

To use the MAXIMAX in Excel, which function are you using?

=MAX

Rolling Back Procedure: at each probability node the __________ is calculated and written above the node.

EMV

To calculate the EVPI take the total expected value with perfect information and subtract the EMV

EVPI

This decision rule selects the decision alternative with the largest expected monetary value

Expected Monetary Value

MAXImizing the MAXimum is the

Maximax decision rule

A more conservative approach to decision making compared to the MAXIMAX is the

Maximin

This decision rule can be used to hedge against the worst possible outcome of a decision

Maximin

This decision rule pessimistically assumes that nature will always be against us, regardless of the decision we make

Maximin

This decision rule uses a regret matrix and shows the difference between the maximum payoff that can occur under a given state of nature, and the payoff that would be realized each alternative under the same set of nature.

Minimax

Do good decisions always result in good outcomes?

No

Monetary values in a decision tree are called

Payoffs

This procedure is a systematic way of calculating EMVs in a decision tree, and thereby identifying the optimal decision strategy

Rolling Back Procedure

Decision trees can be used for any decision problem, but they are particularly useful for more __________ problems

complex

Probabilities in a decision tree are ______________ on the events that have already been observed (events to the left)

conditional

Maximin (_________________ criteria)

conservative

The maximin decision criteria is called the _______________ approach

conservative

Hiring a consulting, test market study, seismic testing are all examples of

contingent decisions

____________ decisions generally require a test or analysis to be done and then await for the ________ of the test which would give a better indication of the results of the next decision.

contingent, results

To do this, you must have some idea of what the future might hold, and a good understanding of the _______ & ___________ of the possible outcomes.

costs, benefits

A _________________ node represents a choice to be made (square)

decision

Decision Trees are composed of nodes and branches. What are three nodes of the decision tree?

decision, events and terminals

Branches leading out of a decision node represent the posible

decisions

An __________ node (circle) represents a "state of nature" or something that happens

event

another word for reward and costs are

gains, losses

A ____________ form known as decision tree can also represent decision problems

graphical

Although the alternative suggested by the maximax decision rules enables one to realize the best possible payoff, it does not ________________ that this payoff will occur.

guarantee

The key characteristic of the MAXIMAX criteria for making decisions is:

high reward and high risk

Many decision problems represent one-time decision for which _____________ data for estimating probabilities are unlikely to exist.

historical

The MAXIMAX decision criteria is appropriate for large companies and not for startups because

in the worst case scenario, companies still lose alot of money, and there is high risk/uncertainty involved with the outcomes.

In a decision tree, time proceeds from _____ to _____

left, right

Probabilistic decision rules can be used if the states of nature in a decision problem can be assigned probabilities that represent their _____________ of occurrence.

likelihood

The key characteristic of the Maximin criteria for making decisions is that there is

low reward, low risk

Perfect Information always gives the ________ value of each probability column

maximum

The Maximax decision rule determines the best (___________) payoff in each row (alternative) of the payoff table and then selects the alternative with the largest payoff

maximum

Another way of approaching decision problems involves the concept of regret, or ____________ _______

opportunity loss

Maximax ( ______________ criteria)

optimistic

The Maximax decision rule is often called the ________________ approach

optimistic

For decision problems that occur more than once, it is often possible to estimate these ________________ from historical data.

probabilities

Branches leading out of _____________ nodes (events) represent the possible outcomes of uncertain events; the decision make has no control over which of these will occur.

probability

Minimax _________

regret

To use the minimax regret decision rule, we must first convert our payoff matrix into a ______________ __________ that summarizes the possible opportunity losses that could result from each decision alternative under each state of nature.

regret matrix

Positive payoffs correspond to _______________ and negative payoffs correspond to ____________

rewards, costs

You can't predict the future. But you can be smart about how you manage in the face of _______ & _______________

risk, uncertainty

The key to success is using data and common sense to take smart risks, and to strike a balance between downside _______ and upside ________.

risks, reward

The EMV for a given decision alternative indicates the average payoff we would receive if we encounter the identical decision problem repeatedly and always _________ this alternative.

select

Rolling Back Procedure: At each decision node, the alternative with the best EMV is

selected

Market demand (not under our control) is an example of a

states of nature

It is reasonable to expect good outcomes to occur more frequently when using a ___________ approach to decision making than if we make decisions in a more haphazard manner.

structures

The MAXIMAX criterion is only appropriate when the decision maker can

survive even the worst case payoff

A ______________ node (triangle) indicates the problem is completed - all decisions have been made.

terminal

You make the best decision based on your analysis and the information you have at the time with the current situation but :

you may not have all of the information, uncertainty/risk can change