Exam 20: An Introduction to Decision Theory

You have a decision to invest $10,000 in any of four different companies. You estimate the probabilities that the economy will be favorable or unfavorable, and you estimate the percent returns over the next year. What is the expected value for Company 3?

A decision maker usually has a choice among several possible alternative acts. For each alternative act, there are many possible results called events.

Besides a payoff table, the information for decision analysis can be organized using a:

You have a decision to invest $10,000 in any of four different companies. You estimate the probabilities that the economy will be favorable or unfavorable, and you estimate the percent returns over the next year. What is the maximax choice?

You have a decision to invest $10,000 in any of four different companies. You estimate the probabilities that the economy will be favorable or unfavorable and you estimate the percent returns over the next year. Based on the maximax criterion, what is the choice?

A student is planning a trip home for the holidays and has three options: car, train, or jet. The decision depends on if the weather is good or bad. In addition, the student estimated the costs for each option. The payoff table follows. What is the expected value of taking the train?

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects to sell between six and nine of them. What is the payoff value for the purchase of nine watermelons when the demand is for six watermelons?

You have a decision to invest $10,000 in any of four different companies. You estimate the probabilities that the economy will be favorable or unfavorable, and you estimate the percent returns over the next year. What company should you choose if the economy is unfavorable?

By definition, the decision maker has no control over the states of nature.

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects to sell between six and nine of them. What is the payoff value for the purchase of eight watermelons when the demand is for six watermelons?

You have a decision to invest $10,000 in any of four different companies. You estimate the probabilities that the economy will be favorable or unfavorable, and you estimate the percent returns over the next year. What is the maximin choice?

The national sales manager for "I colored this" (ICT) T-shirts provides all salespersons with the payoff table shown next, giving the estimated profit when a retailer purchases from one to four dozen T-shirts. The probability of demand for each state of nature is also shown. What is the expected payoff for purchasing one dozen T-shirts?

Statistical decision theory is defined as the collection of techniques a decision maker can apply to choose the best alternative action.

The national sales manager for "I colored this" (ICT) T-shirts provides all salespersons with the following opportunity loss table showing the potential lost profit for each purchase decision or act from one to four dozen T-shirts. The probability of demand for each state of nature is also shown. What is the expected opportunity loss of purchasing four dozen T-shirts?

A table to organize decision-making data, including various acts and possible profits or losses, is called a _______________________.

A person is trying to decide if they should buy a lottery ticket. The ticket costs $2.00. If the ticket is a winner, the prize would be $1,000. Knowing that winning $1,000 is not a certain outcome (state of nature), the person finds that the probability of winning is 0.001. Based on this information, the following payoff table can be constructed: What is the decision using a maximin approach?

How can the probabilities assigned to states of nature be determined?

You have a decision to invest $10,000 in any of four different companies. You estimate the probabilities that the economy will be favorable or unfavorable, and you estimate the percent returns over the next year. What company should you choose if the economy is favorable?

You have a decision to invest $10,000 in any of four different companies. You estimate the probabilities that the economy will be favorable or unfavorable, and you estimate the percent returns over the next year. Based on expected value, what company do you choose?

In decision theory, _______ create uncertainty in selecting an alternative.