Chapter 5 Decision Analysis

Question 1

Decision Analysis

Answer 1

A scientific and structured method for making important difficult decision.

Involves modelling the decision problem and then determining the best alternative that maximizes the expected value

Question 2

Elements that lend themselves to decision analysis approach

Answer 2

1. There is at least one random variable with a t a set of possible values that will have a bearing not eh result of the decision
2. There is a decision with a list of alternatives for the decision maker to choose from.
3. There is an outcome/consequence with a known payoff for each decision alternative under each state of name.

Question 3

Payoff Table

Answer 3

Table showing the payoff for each alternative under each state of nature of a one random variable problem

Question 4

Decision Tree

Answer 4

A graphical representation of the decision, random variables and their probabilities and payoffs.

Question 5

Risk Profile

Answer 5

The probably distribution of payoff of the best alternative

Question 6

Expected value of perfect information (EVPI)

Answer 6

The difference between the expected payoff with perfect information and the expected payoff without the information

Question 7

Expected value of sample information (EVSI)

Answer 7

The difference between the expected payoff with sample (imperfect) information and the expected payoff without sample information

Question 8

Sensitivity to probability

Answer 8

Determine the range of probability for which an alternative has the best expected payoff

Question 9

Sensitivity to Input

Answer 9

An input has a deterministic “nominal” value that is initially estimate as such.

Inputs are components of payoffs

Question 10

Modelling Preferences/Utilities

Answer 10

A formal approach to include preferences is to use utilities.

A utility is a qualification of a persons value for various payoffs. Ex. Risk Adverse