Chapter 13 (Part A) - Decision Analysis

Can be 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 events; Even when a careful ——– ——– 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.

Good decision analysis includes —- ——– that provides probability information about the favorable as well as the unfavorable consequences that may occur.

A decision problem is characterized by decision alternatives, states of nature, and resulting payoffs.

Are the different possible strategies that decision maker can employ.

Refer to future events, not under the control of the decision maker, which may occur; Should be defined so that they are mutually exclusive and collectively exhaustive.

Is a graphical device showing the relationships among the decisions, the chance events, and the consequences.

Depict decision nodes.

Depict chance nodes.

Depict consequence nodes.

Connecting the nodes show the direction of influence.

The consequence resulting from a specific combination of a decision alternative and a state of nature is a:

A table showing payoffs for all combinations of decision alternatives and states of nature is a:

Payoffs can be expressed in terms of: (4)

Three commonly used criteria for decision making when probability information regarding the likelihood of the states of nature is unavailable are: (3)

Would be used by an optimistic decision maker.

Chosen in Optimistic Approach:

If the payoff table was in terms of cost, this would be chosen:

Would be used by a conservative decision maker.

For each decision the minimum payoff is listed and then the decision corresponding to the maximum of these minimum payoffs is selected.

If the payoff was in terms of costs, the maximum costs would be determined for each decision and then the decision corresponding to the minimum of these maximum costs is selected.

The minimax regret approach requires the construction of a: This is done by calculating for each state of nature the difference between each payoff and the largest payoff for that state of nature; Then using this, the maximum regret for each possible decision is listed.

The decision chosen is the one corresponding to the: (Minimax Regret Approach)

If probabilistic information regarding the states of nature is available, one may use the: Here the expected return for each decision is calculated by summing the products of the payoff under each state of nature occurring. The decision yielding the best expected return is chosen.

Is the sum of weighted payoffs for the decision alternative.