Deck 6: Decision Making Under Uncertainty

Question 1

If $v _ { i }$
is the monetary value corresponding to outcome i and $p _ { i }$
is its probability,then the expected monetary value is defined as: EMV = $\sum v _ { i } ^ { 2 } p _ { i }$
.

Answer 1

False

Question 2

The expected value of sample information (EVSI)is the difference between the EMV we can obtain with sample information and the EMV we can obtain without information.

Answer 2

True

Question 3

In decision trees,a probability node (a circle)is a time when the decision maker makes a decision.

Answer 3

False

Question 4

Decision trees are composed of nodes (circles,squares,and triangles)and branches (lines).

Question 5

For each possible decision and each possible outcome,the payoff table lists the monetary value earned by an organization,where a positive value represents a profit and a negative value represents a loss.

Question 6

In a multistage decision problem,decisions and outcomes alternate.That is,a decision maker makes a decision,then some uncertainty is resolved,then the decision maker makes a second decision,then some further uncertainty is resolved,and so on.

Question 7

In decision trees,a decision node (a square)is a time when the result of an uncertain event becomes known.

Question 8

The expected value of perfect information (EVPI)is the most the decision maker would be willing to pay for the sample information.

Question 9

Bayes' is useful in determining the value of perfect information (EVPI).

Question 10

In decision trees,an end node (a triangle)indicates that the problem is completed;that is,all decisions have been made,all uncertainty has been resolved,and all payoffs/costs have been incurred.

Question 11

In making decisions,we choose the decision with the largest expected monetary value.

Question 12

A risk profile lists all possible monetary values and their corresponding probabilities.

Question 13

Tornado charts and spider charts can be used to determine which input variables have the most impact on the expected value in a decision problem

Question 14

In general,the expected monetary values (EMV)represent possible payoffs.

Question 15

In a single-stage decision problem,a single decision is made first,and then all uncertainty is resolved.

Question 16

Prior probabilities are sometimes called likelihoods,the probabilities that are influenced by information about the outcome of an earlier uncertainty.

Question 17

Utility function is a function that encodes a person's or company's feelings toward risk.

Question 18

The expected value of perfect information (EVPI)is the difference between the EMV with perfect information and the EMV with no additional information.

Question 19

The certainty equivalent is the certain dollar amount a risk-averse decision maker would accept in order to avoid a gamble altogether.

Question 20

A spider chart shows both the range (as a percentage)of the variability of the input variables as well as the resulting changes in the expected value

Question 21

When you use the expected monetary value (EMV)criterion,you are not using all of the information that is shown in the risk profiles of alternatives,since you are only comparing the means.

Question 22

With regard to decision making,most individuals are __________________.

A) risk averse
B) risk seekers
C) risk maximizers
D) EMV maximizers
E) None of these options

Question 23

The expected value of perfect information (EVPI)is irrelevant concept since perfect information is almost never available at any price.

Question 24

The expected monetary value (EMV)criterion is sometimes referred to as "playing the averages" and for that reason should only be used for recurring decisions.

Question 25

If x is a monetary value (a payoff if positive,a cost if negative),U(x)the utility of this value,and R > 0 is an adjustable parameter called the risk tolerance,then the function U(x)= 1 - $e ^ { x d R }$
Is called

A) Poisson utility
B) exponential utility
C) binomial utility
D) normal utility

Question 26

For a risk averse decision maker,the certainty equivalent is less than the expected monetary value (EMV).

Question 27

Bayes' Rule is useful for?

A) Value of Sample Information
B) Value of Perfect Information
C) Sensitivity Analysis
D) All of these options
E) None of these options

Question 28

The slope of the lines for the input variables on a tornado chart indicates their relative impact on the expected value

Question 29

Bayes' rule can be used for updating the probability of an uncertain outcome after observing the results of a test or study.

Question 30

In decision trees,probabilities are listed on probability branches.These probabilities may be events that have already been observed.

A) marginal due to
B) conditional on
C) averaged with
D) increased by
E) the same as

Question 31

The sensitivity of the expected value to changes in the input variables can be inferred from a spider chart by observing:

A) The height of the line above the horizontal axis for each variable
B) The length of the line for each variable
C) The slope of the line for each variable
D) The color of the line for each variable
E) None of these options

Question 32

One class of "ready-made" utility functions is called exponential utility.Exponential utility has an adjustable parameter called risk tolerance.The risk tolerance parameter measures:

A) how much money the decision maker has to spend
B) the decision maker's attitude toward risk
C) how much risk there is in a given decision
D) the probability of an unfavorable outcome
E) None of these options

Question 33

A strategy region chart is useful for seeing whether the decision changes over the range of the input variable.

Question 34

Which of the following can be obtained with a tornado chart?

A) The absolute change in expected value resulting from the change in each input variable
B) The percent change in expected value resulting from the change in each input variable
C) A ranking of the relative sensitivity of expected value to each input variable
D) None of these options
E) All of these options

Question 35

Rational decision makers are never willing to violate the expected monetary value (EMV)maximization criterion when large amounts of money are at stake.

Question 36

The preferred criterion in decision making is.

A) maximin
B) maximax
C) EMV
D) None of these options

Question 37

The expected value of sample information (EVSI)is equal to:

A) EMV with posterior information - EMV with prior information
B) EMV with free perfect information - EMV free information
C) EMV with perfect information - EMV without information
D) EMV with free information - EMV without information
E) None of these options

Question 38

If all monetary values in a decision problem are costs,then it is customary to list them as __________ values in a cost table.

A) positive
B) negative
C) either positive or negative
D) All of these options

Question 39

Mathematically,the utility function for risk adverse individuals is said to be _____________ and/or _______________.

A) decreasing,linear
B) decreasing,convex
C) increasing,linear
D) increasing,concave
E) increasing,decreasing

Question 40

All problems related to decision making under uncertainty have three common elements:

A) the mean,median,and mode
B) the set of decisions,the cost of each decision and the profit that can be made from each decision
C) the set of possible outcomes,the set of decision variables and the constraints
D) the set of decisions,the set of possible outcomes,and a value model that prescribes results
E) None of these options

Question 41

Which of the following is true with regard to a good decision?

A) It ensures that good outcomes will be obtained
B) It accounts for unlucky outcomes
C) It should be independent of the sequencing of uncertainties and decisions
D) It should incorporate all information about uncertainties and alternatives
E) All of these options

Question 42

The solution procedure that was introduced in the book for decision trees is called the:

A) folding diagram
B) single-stage method
C) risk profile method
D) precision tree method
E) folding back on the tree

Question 43

When the lines for two alternatives cross on a strategy region chart,this shows:

A) A change in which decision alternative is optimal
B) The point at which a decision was made
C) The point where the rate of change in expected value is zero
D) Resolution of the uncertainty about the input variable
E) None of these options
An investor has $25,000 in assets and faces a difficult choice between two investments.If he invests in the first opportunity there is a 70% chance that he will increase his assets by $75,000 and a 30% chance that he will increase his assets by $20,000.If he invests in the second option there is a 40% chance that he will increase his assets by $150,000 and a 60% chance that he will increase his assets by $5,000.

Question 44

Which of these sensitivity analysis charts is most useful in determining whether the optimal decision changes over the range of the input variable?

A) Strategy region chart
B) Tornado chart
C) Spider chart
D) All of these options
E) None of these options

Question 45

In a single-stage decision tree problem,all ___________ are made first and then all ___________ is (are)resolved.

A) decisions;uncertainty
B) calculations;probabilities
C) EMV calculations;posterior probabilities
D) likelihoods;posterior probabilities
E) prior probabilities;joint probabilities

Question 46

A risk profile lists:

A) all possible monetary values and their corresponding probabilities
B) all possible outcomes and their corresponding utility
C) all options and their possible outcomes
D) the nodes and branches for each possible outcome
E) None of these options

Question 47

In decision trees,time:

A) is constant
B) proceeds from bottom to top
C) proceeds from top to bottom
D) proceeds from right to left
E) proceeds from left to right

Question 48

There are three types of nodes that are used with the decision trees.They are the:

A) mean nodes,variance nodes,and the standard deviation nodes
B) probability nodes,risk nodes,and the expected value nodes
C) supply nodes,demand nodes,and the expected value nodes
D) decision nodes,probability nodes,and end nodes.
E) horizontal nodes,vertical nodes,and the diagonal nodes

Question 49

A payoff table lists the monetary values (profit or loss)for each possible and each possible _______________.

A) mean and standard deviation
B) decision and utility
C) decision and outcome
D) risk profile and outcome
E) None of these options

Question 50

Utility functions are mathematical functions that transform monetary values - payoffs and costs - into ________________.

A) expected values
B) utility values
C) EMV values
D) anchor values
E) None of the above

Question 51

The expected value of perfect information (EVPI)is equal to:

A) EMV with posterior information - EMV with prior information
B) EMV with free perfect information - EMV with information
C) EMV with free perfect information - EMV with no information
D) EMV with perfect information - EMV with less than perfect information

Question 52

Expected monetary value (EMV)is:

A) the average or expected value of the decision if you knew what would happen ahead of time
B) the weighted average of possible monetary values,weighted by their probabilities
C) the average or expected value of the information if it was completely accurate
D) the amount that you would lose by not picking the best alternative
E) a decision criterion that places an equal amount on all states of nature

Question 53

In the nomenclature of Bayes' Rule,which of the following are probabilities that are conditioned on information that is obtained?

A) Prior probabilities
B) Posterior probabilities
C) Marginal probabilities
D) Objective probabilities
E) Subjective probabilities

Question 54

Which of the following statements are true?

A) Sensitivity analysis is a process of seeing how optimal decision and EMV vary when one or more inputs vary.
B) Multistage decision problem is one where decisions and observations of uncertain outcomes alternate.
C) Contingency plan is a strategy in a multistage decision problem that specifies which decision to make for each possible outcome.
D) All of the above
E) None of the above