Exam 25: Decision Analysis

In decision analysis, the alternatives are referred to as events and the states of nature are referred to as acts.

An opportunity loss is the difference between what the decision maker's profit for an act (alternative) is and what the profit could have been had the best decision been made.

Since the expected monetary value decision is always the same as the expected opportunity loss decision, then EMV*( $a _ { i }$ ) = EOL*( $a _ { i }$ ), for any alternative $a _ { i }$ .

The expected payoff with perfect information (EPPI) represents the maximum amount a decision maker would be willing to pay for perfect information.

The expected value of perfect information (EVPI) is the difference between the expected payoff with perfect information (EPPI) and the expected monetary value (EMV*). That is, EVPI = EPPI - EMV*.

Which of the following statements is correct?

Define the expected payoff with perfect information (EPPI).

A payoff table lists the monetary values for each possible combination of:

The objective of a preposterior analysis is to determine whether the value of the prediction is greater or less than the cost of the information.

Salaries for employees would be considered a state of nature for a business firm.

Define expected opportunity loss, EOL.

In making decisions, we choose the decision with the smallest expected monetary value, or the largest expected opportunity loss.

We can use the payoff table to calculate the expected monetary value (EMV) and the expected opportunity loss (EOL) of each act (alternative).

Which of the following would not be considered a state of nature for a business firm?

Which of the following best describes the expected value of sample information (EVSI)?

The following table displays the payoffs (in thousands of dollars) for five different decision alternatives under three possible states of nature: Alternative State of Nature \ 100 \ 80 \ 35 \ 20 \ 0 \ 70 \ 75 \ 55 \ 50 \ 15 -\ 30 \ 0 \ 35 \ 55 \ 60 The prior probabilities of the states of nature are: P( $S _ { 1 }$ ) = 0.2, P( $S _ { 2 }$ ) = 0.3, P( $S _ { 3 }$ ) = 0.5 a. Calculate the expected monetary value for each alternative with present information. What decision should be made using the EMV criterion? b. Calculate the expected payoff with perfect information. c. Calculate the expected value of perfect information. d. Convert the payoff table to an opportunity loss table. e. Calculate the expected opportunity loss for each act with present information. What decision should be made using the EOL criterion?

If EOL( $a _ { 1 }$ ) = $13 000, EOL( $a _ { 2 }$ ) = $25 000 and EOL( $a _ { 3 }$ ) = $20 000, then EOL* = $25 000.

Define the term payoff table.

Worker safety laws would be considered a state of nature for a business firm.

In general, the branches of a decision tree represent stages of events.