Exam 12: Decision Analysis

Consider the following decision tree. Which decision, A or B, is best? What is the expected value of this decision?

An investor is consider four different opportunities, A, B, C, or D. The payoff for each opportunity will depend on the economic conditions, represented in the payoff table below. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~{ \text { Economic Condition } } \\ \begin{array} { c} \text { Investment } & \begin{array} { c } \text { Poor } \\ \text { (S1) } \end{array} & \begin{array} { c } \text { Average } \\ \left( \mathbf { S } _ { \mathbf { 2 } } \right) \end{array} & \begin{array} { c } \text { Good } \\ \left( \mathbf { S } _ { \mathbf { 3 } } \right) \end{array} & \begin{array} { c } \text { Excellent } \\ \left( \mathbf { S } _ { \mathbf { 4 } } \right) \end{array} \\ \text { A } & 50 & 75 & 20 & 30 \\ \text { B } & 80 & 15 & 40 & 50 \\ \text { C } & - 100 & 300 & - 50 & 10 \\ \text { D } & 25 & 25 & 25 & 25 \end{array} -What decision would be made under maximax?

________ is a measure of personal satisfaciton derived from money.

The appropriate criterion is dependent on the risk personality and philosophy of the decision maker.

Regret is the difference between the payoff from the best decision and all other decision payoffs.

Napoleon is contemplating four institutions of higher learning as options for a Masters in Business Administration. Each university has strong and weak points and the demand for MBA graduates is uncertain. The availability of jobs, student loans, and financial support will have a significant impact on Napoleon's ultimate decision. Vanderbilt and Seattle University have comparatively high tuition, which would necessitate Napoleon take out student loans resulting in possibly substantial student loan debt. In a tight market, degrees with that cachet might spell the difference between a hefty paycheck and a piddling unemployment check. Northeastern State University and Texas Tech University hold the advantage of comparatively low tuition but a more regional appeal in a tight job market. Napoleon gathers his advisory council of Kip and Pedro to assist with the decision. Together they forecast three possible scenarios for the job market and institutional success and predict annual cash flows associated with an MBA from each institution. All cash flows in the table are in thousands of dollars. School Scenario 1 Scenario 2 Scenario 3 Vanderbilt 95 20 -10 Texas Tech 55 60 60 Seattle 90 10 80 Northeastern State 65 50 60 -Kip tends to be extremely optimistic. Which decision making criterion would he naturally select and what conclusion would he recommend to Napoleon? Why?

The maximax criterion results in the maximum of the maximum payoffs.

The expected value of perfect information divided by the expected value of sample information is the efficiency of perfect information.

A small entrepreneurial company is trying to decide between developing two different products that they believe they can sell to two potential companies, one large and one small. If they develop Product A, they have a 50% chance of selling it to the large company with annual purchases of about 20,000 units. If the large company won't purchase it, then they think they have an 80% chance of placing it with a smaller company, with sales of 15,000 units. On the other hand if they develop Product B, they feel they have a 40% chance of selling it to the large company, resulting in annual sales of about 17,000 units. If the large company doesn't buy it, they have a 50% chance of selling it to the small company with sales of 20,000 units. -What is the probability that Product A will being purchased by the smaller company?

The Hurwicz criterion multiplies the

A decision tree is a diagram consisting of

A group of friends are planning a recreational outing and have constructed the following payoff table to help them decide which activity to engage in. Assume that the payoffs represent their level of enjoyment for each activity under the various weather conditions. Weather Cold Warm Rainy Bike: Al 10 8 6 Hike: A2 14 15 2 Fish: A3 7 8 9 -If the probabilities of cold weather (S1), warm weather (S2), and rainy weather (S3) are 0.2, 0.4, and 0.4, respectively, then what decision should be made using the expected value criterion?

If a student attends every management science class, the probability of passing the course is 0.80; but if the student only attends randomly, then the probability of passing the course is 0.50. If a student fails, he or she can take a makeup exam where the probability of passing is 0.60 if the student has attended every class. This probability of passing the makeup exam drops to 0.10 if the student has attended at random. Passing the course is worth 5 credits. Full time attendance "costs" 3 credits in terms of energy and time, whereas random attendance "costs" only 1 credit. Use a decision tree to decide which is the best attendance pattern to adopt. Assume that all failing students take the make up exam and that the payoff for failing is equal to 0.

Lucky Lucy is playing the slots in Reno, Nevada, holding her last silver dollar. There are three possible payoffs if she wins: one cherry, $1; two cherries, $5; or three cherries, $50. Anything else on the slot machine loses. Construct the payoff table for Lucky Lucy.

People who take a chance on a bonanza with a very low probability of occurrence in lieu of a sure thing are

When the ________ criterion is used, the maximum of the minimum payoffs is selected

The maximax criterion is optimistic.

The efficiency of sample information is the ratio of the expected value of sample information to ________.

The Hurwicz criterion is a compromise

People who forgo a high expected value to avoid a disaster with a low probability are