3 Flashcards
What does standard deviation represent in decision-making?
Standard deviation tells us how “spread out” or “different” the possible outcomes are from the average (expected value).
So, standard deviation measures the risk by showing how much the results could differ from what you expect. If the standard deviation is small, the results are more predictable. If it’s large, the results are more uncertain.
What is the coefficient of variation, and why is it used?
The coefficient of variation (CV) is a relative measure of risk that compares the standard deviation (how much the outcomes vary) to the expected value (the average outcome)
The CV is useful because it allows you to compare the level of risk between different projects, investments, or decisions, even if their expected values are very different. Instead of just looking at the size of the standard deviation, the CV tells you how much risk exists relative to the size of the outcome.
What is the maximin decision criterion?
The maximin criterion assumes the worst possible outcome and selects the option with the best minimum payoff.
What is the maximax decision criterion?
The maximax criterion assumes the best possible outcome and selects the option with the highest maximum payoff.
What is the regret criterion in decision-making?
The regret criterion minimises the maximum regret by choosing the option with the least potential regret.
E.g. Calculate regret by comparing actual payoffs with the best possible payoffs for each state and choosing the option with the smallest maximum regret.
What is a decision tree, and how is it used?
A decision tree visually maps out possible decisions, outcomes, and probabilities. It consists of decision nodes (choices), outcome nodes (results), and branches with assigned probabilities and payoffs.
What is a probability distribution in decision-making?
A probability distribution lists all possible outcomes of a decision and their probabilities. It helps managers understand the range of outcomes and not just the most likely result.
What is the value of perfect information?
VPI measures how much a company would pay to eliminate uncertainty by obtaining accurate information.
