Chapter 7

Question 1

define decision model

Answer 1

a type of decision analysis tool that helps a decision maker evaluate and compare several potential courses of action.

Question 2

What is a decision theory

Answer 2

seeks to find strategies for maximizing the desirable outcomes from decision making.

Question 3

What is a decision theory model?

Answer 3

a quantitative approximation of the real-world processes used in making rational decisions.

Question 4

what are descision alternatives?

Answer 4

the choices a decision maker is considering, the alternatives refer to the elements under the control of the decision maker.

Question 5

what is the states of nature in a decision theory model?

Answer 5

potential future influences on th eoutcome of a deicsion that are not under the decision makers control

Question 6

what is a decision environment?

Answer 6

refers to the relative strength of available information . about relevant alternatives states of nature. Can be clasified as

1) certainty
2) risk
3) uncertainty

Question 7

What is certainty?

Answer 7

the probability of occurrence with no potential for deviation from the expected outcome.
- when all outcomes of a decision are known.

Question 8

What is risk?

Answer 8

This exitsts in a decision environment if incomplete but reliable information is available. such as the variable states of nature could produce variable outcomes for each decision alternatve.
- potential for unexpected outcome

Question 9

What is uncertainty?

Answer 9

exists in a decision environment if little or no reliable information is aailable and the deicsion maker is unable or unwilling to assign individual probabilities to each possible state of nature.
- each state of nature has an equal probability of occuring.

Question 10

what is decision theory payoff?

Answer 10

project or estimated valye of an outcome from a decsiion.

- can be +ve or -ve.

Question 11

What is a payoff table?

Answer 11

decision analysis tool that symmarizes potential outcomes from a decision in tubular format.
- used for summarizing and organixing information about outcomes from decision alternatives.

Question 12

what is a conditional payoff table?

Answer 12

type of payoff table showing two or more states of nature.

Question 13

What is found in each payoff table cell?

Answer 13

cotnaines projected payoff valye based on

1) a decision alternative
2) state of nature

Question 14

What rules govern the construction of a conditional payoff table?

Answer 14

1) the list of decision alternatives must be complete
2) the decision alternatives must be mutually exclusive
3) the list of alternatives states of nature must be complete
4) the alternative states of nature must be mutually exclusive

Question 15

what are specifications of a basic payoff table?

Answer 15

1) each decsiion alternative appears in a row heading on the left-hand side of the table
2) each possible state of nature appears in the column heding
3) each cell contains a value for a payoff.

Question 16

What is payoff analysis?

Answer 16

formal approach to decsiion making.
Each combination of a decision alternative and state of nature generates a potential payoff for the decision makers consideration.

Question 17

What is a decision criteria?

Name some examples

Answer 17

the rules a decision maker uses to select a decision alternative.

1) minimize prohected new labour cost
2) achieve the greatest projected cost savings
3) select the investment project with the highest ROR

Question 18

Name 5 decsision criterias developed and popularized by noted mathematicians and philisophers and used with decision therory models.

Answer 18

1) the expected monetary value (EMV) criterion
2) the insufficient reason criterion
3) the maximax criterion
4) the maximin criterion
5) the minimax regret criterion

Question 19

True or false decision criteria do not, by themselves, select the best alternative. Instead they indicate which decision alternative best meets a stated rule.

Answer 19

Tue

Question 20

What is a dominant decision alternative?

Answer 20

exists if, for all states of nature, the same decision alternatives lead to the best expected payoff.

Question 21

What is the best payoff?

Answer 21

found in a table as the highest positive value in each state of nature column.

Question 22

Name some basic properties of probability

Answer 22

1. a certainty occurrence has a 100% probability or a probability or 1.00
2. No probability can be greater than 1.00
3. no probability can be less than 0. There must be a +ve value
4. uncertainty has a probability between 0 and 1.00
5. probabilities involving uncertainty are expreseed as percentages or decimals.

Question 23

What should a decision criterion reflect?

Answer 23

both the decision environment (risk or uncertainty) and the decision maker’s objectives and philosophy.

Question 24

What is the most commonly used decision criterion in a decision environment of risk?

Answer 24

the EMV criterion. This states that the best decision alternative is the one with the highest positive EMV. Thus the EMV criterion, requires the analyst to calculate the expected monetary value for every potential decision outcome.

Question 25

Define: expected monetary value

Answer 25

the estimated payoff for a decision alternative in a payoff table, consisting of the weighted sum of the conditional payoff associated with each of several potential states of nature.

Question 26

What are the steps of decision analysis under Risk or Uncertainty environments?

Answer 26

1. decision alternatives: identify all decision alternatives
2. States of nature: identify all possible states of nature
3. Payoff table: create a payoff table
4. Decision criteria: apply a decision criterion.

Question 27

What are two important distinctions between the treatment of decisions under risk or uncertainty?

Answer 27

1. under conditions of risk, a decision analyst typically applies the EMV criteron. if under uncertainty, a number of certieria could be applied.
2. Under conditions of uncertainty, a decision analyst does not assign individual probabilities to the states of nature. No one state of nature is more likely than another to occur.

Question 28

Define insufficient reason criterion

- also called laplace criterion

Answer 28

is a decision rule that requires, the decision maker to select the option with the best total payoff.

Question 29

what is maximax criteron

Answer 29

a decision rule that requires an analyst to identigy the decisionj alternative that maximizes the maximum projected payoff
- requires identifying the highest of the maximum project payoff for all decsiion alternatives.

Question 30

What do you call the value for the decision alternative that maximizes the maximum projected payoff?

Answer 30

maximum pay off.
- found by a decsiion analyst that selectes from the conditional payoff table the decision alternative that shows the best projected payoff for any state of nature.

Question 31

what is the maximin criteron/

Answer 31

a decision rule designed to identify the decision alternative that will yield the maximum minimum payoff.

• requires decision analyst to identify the decision alternative with the best of the worst projected payoffs.
• focuses on the minimum benefits and thus, reflects a more conservative approach than does the maximax criterion.

Question 32

define regret

Answer 32

defined as the oppertunity cost from selecting a nonoptimal decision.

Question 33

what is opportunity cost?

Answer 33

defined as the benefit that is forfeited or given up in choosing one decision alternative over another.

Question 34

What is the minimax regret criterion?

Answer 34

this attempts to minimize the maximum possible regret in a decision outcome by identifying the decision alternative that would result in the least regret.

Question 35

What is a regret table?

Answer 35

A tubular presentation of the montary regret values that would result from an array of decision alternatives and states of nature.

Question 36

what are the steps to calculating a monetary regret amount from a payoff table, then creating the regret table, and finally applying the minimax regret criterion ?

Answer 36

1. identify the highest value in each column of a payoff table- the highest possible payoff value for each identified state of nature
2. substract each valye in the column from that highest value
3. enter the result in a new table, the regret table.
4. using the regret table, identify the highest regret value for each decision alternative.
5. finally, select the decision alternative that has the lowest value among the highest regret values.