Exam 24: Decision Making and Risk

Use a payoff table or decision tree. -A land owner is considering a community development project in the southeastern U.S. He is faced with two alternatives: (1) build detached homes in a planned retirement Community or (2) build a smaller townhouse / condominium complex. Mortgage interest Rates will affect his outcomes and the payoff (in $ millions) table is shown below. According to the maximin approach, the land owner should

Find expected values, standard deviations and return to risk ratios. -A mid-size company is transitioning to a new ERP system. Consequently, company Files need to be modified and / or updated so as to be compatible for transfer to the new System. The company is considering three alternatives to deal with this extra work load: (1) outsourcing (2) hiring temporary staff or (3) using full time staff in overtime. The Estimated costs (in $100,000) associated with each of these actions depend on the Difficulty level associated with file modification and transfer, which can be at one of Three levels (easy, moderately difficult, or extremely difficult) as shown below. If the Likelihoods of easy, moderately difficult and extremely difficult file modifications are 0.2,0.4 and 0.4, respectively, the standard deviation in costs (in $100,000) associated with Outsourcing is Action Easy Moderately Difficult Extremely Difficult Outsource 2.5 3.0 3.5 Temporary Staff 1.5 2.6 4.0 Overtime 1.2 2.8 4.2

Use a payoff table or decision tree. -A mid-size company is transitioning to a new ERP system. Consequently, company Files need to be modified and / or updated so as to be compatible for transfer to the new System. The company is considering three alternatives to deal with this extra work load: (1) outsourcing (2) hiring temporary staff or (3) using full time staff in overtime. The Estimated costs (in $100,000) associated with each of these actions depend on the Difficulty level associated with file modification and transfer, which can be at one of Three levels (easy, moderately difficult, or extremely difficult) as shown below. Using The minimin approach, the company should Action Easy Moderately Difficult Extremely Difficult Outsource 2.5 3.0 3.5 Temporary Staff 1.5 2.6 4.0 Overtime 1.2 2.8 4.2

Using the maximin approach, which action should the land owner choose?

Use a payoff table or decision tree. -A mid-size company is transitioning to a new ERP system. Consequently, company Files need to be modified and / or updated so as to be compatible for transfer to the new System. The company is considering three alternatives to deal with this extra work load: (1) outsourcing (2) hiring temporary staff or (3) using full time staff in overtime. The Estimated costs (in $100,000) associated with each of these actions depend on the Difficulty level associated with file modification and transfer, which can be at one of Three levels (easy, moderately difficult, or extremely difficult) as shown below. Using the Minimax approach, the company should Action Easy Moderately Difficult Extremely Difficult Outsource 2.5 3.0 3.5 Temporary Staff 1.5 2.6 4.0 Overtime 1.2 2.8 4.2

Find the expected value of an action. -A land owner is considering a community development project in the southeastern u.S. He is faced with two alternatives: (1) build detached homes in a planned retirement Community or (2) build a smaller townhouse / condominium complex. Mortgage interest Rates will affect his outcomes and the payoff (in $ millions) table is shown below. If the Probabilities for future mortgage interest rates going up, staying about the same, and Going down are .35, .50 and .15, respectively, what is the expected value for building an Active retirement community?

Use a payoff table or decision tree. -A farm owner in upstate New York who grows summer vegetables (e.g. tomatoes) Must decide whether to employ additional pickers this season. If he does, he could hire Either migrant workers or local teenagers who need summer employment. The migrant Workers are more experienced, faster, but more expensive. Although the teenagers will Work for less, they lack experience and tend to damage plants and produce. His profits Depend on the growing season as shown below. Using the maximax approach, the farmer

Apply the expected value approach to decision making. -A mid-size company is transitioning to a new ERP system. Consequently, company Files need to be modified and / or updated so as to be compatible for transfer to the new System. The company is considering three alternatives to deal with this extra work load: (1) outsourcing (2) hiring temporary staff or (3) using full time staff in overtime. The Estimated costs (in $100,000) associated with each of these actions depend on the Difficulty level associated with file modification and transfer, which can be at one of Three levels (easy, moderately difficult, or extremely difficult) as shown below. If the Likelihoods of easy, moderately difficult and extremely difficult file modifications are 0.2,0.4 and 0.4, respectively, the best decision according to the expected value approach is to Action Easy Moderately Difficult Extremely Difficult Outsource 2.5 3.0 3.5 Temporary Staff 1.5 2.6 4.0 Overtime 1.2 2.8 4.2

Find the expected value of perfect information. -A mid-size company is transitioning to a new ERP system. Consequently, company Files need to be modified and / or updated so as to be compatible for transfer to the new System. The company is considering three alternatives to deal with this extra work load: (1) outsourcing (2) hiring temporary staff or (3) using full time staff in overtime. The Estimated costs (in $100,000) associated with each of these actions depend on the Difficulty level associated with file modification and transfer, which can be at one of Three levels (easy, moderately difficult, or extremely difficult) as shown below. If the Likelihoods of easy, moderately difficult and extremely difficult file modifications are 0.2,0.4 and 0.4, respectively, what is the expected value (in $100,000) of perfect Information? Action Easy Moderately Difficult Extremely Difficult Outsource 2.5 3.0 3.5 Temporary Staff 1.5 2.6 4.0 Overtime 1.2 2.8 4.2

Apply the expected value approach to decision making. -A land owner is considering a community development project in the southeastern U.S. He is faced with two alternatives: (1) build detached homes in a planned retirement Community or (2) build a smaller townhouse / condominium complex. Mortgage interest Rates will affect his outcomes and the payoff (in $ millions) table is shown below. If the Probabilities for future mortgage interest rates going up, staying about the same, and Going down are .35, .50 and .15, respectively, the best decision according to the expected Value approach is to

Using the maximax approach, which action should the farm owner choose?

Find expected values, standard deviations and return to risk ratios. -A farm owner in upstate New York who grows summer vegetables (e.g. tomatoes) Must decide whether to employ additional pickers this season. If he does, he could hire Either migrant workers or local teenagers who need summer employment. The migrant Workers are more experienced, faster, but more expensive. Although the teenagers will Work for less, they lack experience and tend to damage plants and produce. His profits Depend on the growing season as shown below. Suppose the farmer's almanac predicts The probability of a good growing season this year to be .75. The return to risk ratio for Hiring migrant workers is

Find the expected value of perfect information. -A land owner is considering a community development project in the southeastern u.S. He is faced with two alternatives: (1) build detached homes in a planned retirement Community or (2) build a smaller townhouse / condominium complex. Mortgage interest Rates will affect his outcomes and the payoff (in $ millions) table is shown below. If the Probabilities for future mortgage interest rates going up, staying about the same, and Going down are .35, .50 and .15, respectively, the expected value of perfect information is

Find the expected value of an action. -A mid-size company is transitioning to a new ERP system. Consequently, company Files need to be modified and / or updated so as to be compatible for transfer to the new System. The company is considering three alternatives to deal with this extra work load: (1) outsourcing (2) hiring temporary staff or (3) using full time staff in overtime. The Estimated costs (in $100,000) associated with each of these actions depend on the Difficulty level associated with file modification and transfer, which can be at one of Three levels (easy, moderately difficult, or extremely difficult) as shown below. If the Likelihoods of easy, moderately difficult and extremely difficult file modifications are 0.2,0.4 and 0.4, respectively, the expected cost (in $100,000) of hiring temporary staff is Action Easy Moderately Difficult Extremely Difficult Outsource 2.5 3.0 3.5 Temporary Staff 1.5 2.6 4.0 Overtime 1.2 2.8 4.2

Revise probabilities based on sample information. -A mid-size company is transitioning to a new ERP system. Consequently, company Files need to be modified and / or updated so as to be compatible for transfer to the new System. The company is considering three alternatives to deal with this extra work load. The difficulty level associated with file modification and transfer will affect the decision, And initially the company believes there is a 20% chance the file modifications will be Easy, a 40% chance that they will be moderately difficult and a 40% that they will be Extremely difficult. The company decides to hire a consultant to review a sample of old Files and provide her opinion as to whether the modifications required will be extensive Or minor. Suppose the probabilities associated with her professional opinion are as Follows: P (Minor | Easy) = 0.80, P (Minor | Moderately Difficult) = 0.50 and P (Minor | Extremely Difficult) = 0.20. In other words, the chance that she will say the Modifications required are minor given that the transfer will indeed be easy, moderately Difficult and extremely difficult are 0.80, 0.50, and 0.20, respectively. What is the Probability that the difficulty of the file modifications and transfer will be extremely Difficult given that the consultant believes the modifications required are extensive?

Using the maximax approach, which action should the land owner choose?

Use a probability tree to find probabilities. -A mid-size company is transitioning to a new ERP system. Consequently, company Files need to be modified and / or updated so as to be compatible for transfer to the new System. The company is considering three alternatives to deal with this extra work load. The difficulty level associated with file modification and transfer will affect the decision, And initially the company believes there is a 20% chance the file modifications will be Easy, a 40% chance that they will be moderately difficult and a 40% that they will be Extremely difficult. The company decides to hire a consultant to review a sample of old Files and provide her opinion as to whether the modifications required will be extensive Or minor. Suppose the probabilities associated with her professional opinion are as Follows: P (Minor | Easy) = 0.80, P (Minor | Moderately Difficult) = 0.50 and P (Minor | Extremely Difficult) = 0.20. In other words, the chance that she will say the Modifications required are minor given that the transfer will indeed be easy, moderately Difficult and extremely difficult are 0.80, 0.50, and 0.20, respectively. What is the Probability that the consultant will determine that the modifications required are minor?

Revise probabilities based on sample information. -A mid-size company is transitioning to a new ERP system. Consequently, company Files need to be modified and / or updated so as to be compatible for transfer to the new System. The company is considering three alternatives to deal with this extra work load. The difficulty level associated with file modification and transfer will affect the decision, And initially the company believes there is a 20% chance the file modifications will be Easy, a 40% chance that they will be moderately difficult and a 40% that they will be Extremely difficult. The company decides to hire a consultant to review a sample of old Files and provide her opinion as to whether the modifications required will be extensive Or minor. Suppose the probabilities associated with her professional opinion are as Follows: P (Minor | Easy) = 0.80, P (Minor | Moderately Difficult) = 0.50 and P (Minor | Extremely Difficult) = 0.20. In other words, the chance that she will say the Modifications required are minor given that the transfer will indeed be easy, moderately Difficult and extremely difficult are 0.80, 0.50, and 0.20, respectively. What is the Probability that the difficulty of the file modifications and transfer will be extremely Difficult given that the consultant believes the modifications required are minor?

Using the maximin approach, which action should the farm owner choose?

Suppose housing analysts predict that the probabilities for future mortgage interest rates going up, staying about the same, and going down are .35, .50 and .15, respectively.