Ch. 14 Decision Analysis

Question 1

Primary problems in the decision making process include:

Answer 1

Uncertainty regarding the future
Lack of data
Conflicting objectives

Question 2

A choiceamong several alternatives

Answer 2

Decision

Question 3

A course of action intended to solve a problem

Answer 3

Alternative

Question 4

Represents various factors that are important to the decision maker and influenced by alternatives

Answer 4

Criteria

Question 5

Correspond to future events that are not under the decision makers control

Answer 5

State of Nature

Question 6

The Three types of decision making environments:

Answer 6

Decision-making under 1) risk, 2) certainty, 3) uncertainty

Question 7

The list of possible future events is known, and the probability of each event occurring can be assigned a probability

Answer 7

Decision-making under risk

Question 8

The list of possible future events is known with complete certitude

Answer 8

Decision-making under certainty

Question 9

The list of possible future events is known, but the associated probabilities are unknown

Answer 9

Decision-making under uncertainty

Question 10

A tabular rendering of the various alternatives and states that reports the corresponding outcomes.
Summarizes the final outcome (or payoff) for each decision alternative under each possible state of nature.

Answer 10

Payoff Table (Matrix)

Question 11

The two basic structural components of a payoff table are?

Answer 11

States of nature and Alternatives

Question 12

In a payoff table -

columns equal?
rows equal?
Bottom row equals?

Answer 12

Columns = the decision options (alternatives)
Rows = states of nature
Bottom row = expected value

Question 13

What is a probabilities range in value between?

Answer 13

zero and one

Question 14

represent the likelihood of occurrence based on historical data
examples: weather and gaming

Answer 14

Objective probabilities

Question 15

A process for selecting from several options based on facts, observations, and data

Answer 15

Objective decision-making

Question 16

when there is no historical data available. It is PERSONAL

ex. Interviews with experts in the field

Answer 16

Subjective probabilities

Question 17

A process for selecting from several options based on assumptions, beliefs, and opinions

Answer 17

Subjective decision-making

Question 18

A function that maps an observation to an appropriate action

Answer 18

Decision rule

Question 19

The weighted average of a variable where the weights are the respective probabilities associated with the various outcomes

Answer 19

Expected value

Question 20

The decision rule can be divided into two methods:

Answer 20

Probabilistic Methods

Non Probabilistic Methods

Question 21

Those that assume the probabilities of occurrence can be assigned to the states of nature in a decision problem

Answer 21

Probabilistic Methods

Question 22

Those that DO NOT assume the probabilities of occurrence can be assigned to the states of nature in a decision problem

Answer 22

Non Probabilistic Methods

Question 23

You use the following when probabilities are what?
Expected Monetary Value Decision Rule (EMV)
Expected Opportunity Loss (EOL)
Expected Value of Perfect Information (EVPI)

Answer 23

PROBABILITIES ARE KNOWN

Question 24

You use the following when probabilities are what?
Maximax decision rule
Maximin decision rule
Minimax Regrest decision rule

Answer 24

PROBABILITIES ARE UNKNOWN

Question 25

Select the alternative with the largest expected monetary value (EMV)

Answer 25

Expected Monetary Value Decision Rule

Question 26

for a given decision alternative, this indicates the average monetary outcome of a decision if it was repeated a large number of times

Answer 26

Expected Monetary Value (EMV)

Question 27

The maximum one is willing to pay for perfect information. | Also, The decision with the smallest EOL will always have the largest EMV

Answer 27

Expected Opportunity Loss (EOL)

Question 28

expected value obtained with perfect information minus maximum EMV (without sample information)

Answer 28

Expected Value of Perfect Information (EVPI)

Question 29

Identify the maximum payoff for each alternative and choose the alternative with the largest maximum payoff. Also says nature will always be on our side regardless of the decision

Answer 29

Maximax decision rule

Question 30

Identify the minimum payoff for each alternative and choose the alternative with the largest minimum payoff. Also says nature will always be against us regardless of the decision

Answer 30

Maximin decision rule

Question 31

Compute the possible loss for each alternative under each state of nature; identify the maximum possible regret loss for each alternative; choose the alternative with the smallest maximum loss

Answer 31

Minimax Regret decision rule

Question 32

A modelling system that supports the decision-making process ``` Steps include: 1 Problem Statement 2 Model Selection 3 Evaluate alternatives 4 Select decision 5 Implement ```

Answer 32

Decision support system

Question 33

A graphical decision support system used to analyze problems involving risk. Arranges decision alternatives and states of nature as prescribed by the problem situation. Usually more effective multi decision type applications

Answer 33

Decision trees

Question 34

How do you evaluate a decision tree?

Answer 34

RIGHT TO LEFT

Question 35

when dealing with decision trees, a process to determine the largest EMV

Answer 35

Rolling Back

Question 36

when dealing with decision trees, you do this by adding double vertical lines to the suboptimal event branch, and it represents an optimal alternative at a decision node.

Answer 36

Pruning

Question 37

Decision problems often involve two or more conflicting criterion and two or more alternatives: Ex Job Offers involve - salary, location and career potential Car buying - price, warranty, mileage, safety Sometimes these criteria conflict with one another.

Answer 37

Multicriteria Decision-Making

Question 38

The best when there are multiple decision criteria

Answer 38

Multi Attribute Analysis

Question 39

Typically each alternative and criterion pair are ranked on a scale. Weights are assigned to each criterion. A weighted average is computed for each alternative. The alternative with the largest weighted average is selected

Answer 39

Multicriteria scoring model

Question 40

provide an effective way of graphically summarizing numerous alternatives in a multicriteria scoring model

Answer 40

Radar charts

Question 41

Provides a more structured approach for determining scores and weights for the multicriteria scoring model Especially helpful in focusing attention and discussion on the important aspects of a problem in group decision making environments.

Answer 41

Analytical Hierarchy Process (AHP)

Question 42

Step 1 Create a pairwise comparison matrix for each alternative on each criterion Step 2 Normalizing the comparisons Step 3 Apply consistency in the preference ratings given in the pairwise comparison matrix Step 4 Obtain scores for the remaining criteria Step 5 Obtain criterion weights Step 6 Implement the scoring model

Answer 42

Steps for the Analytical Hierarchy Process (AHP)

Question 43

Problems where a multiple decisions must be made to get to the final outcome.

Answer 43

MULTI STAGE DECISION PROBLEMS

Question 44

A graph or a tree that shows the chances associated with possible outcomes. It is an effective tool for breaking an EMV into its component parts and communicating information about the actual outcomes that can occur as the result of various decisions.

Answer 44

Risk Profile

Question 45

A process for making decisions where there is more than one criterion

Answer 45

Multifactor modelling

Question 46

Includes often available information about the possible outcomes of decisions before the decisions are made. This sample information allows us to refind probability estimates associated with various outcomes. The basic tradeoff is the cost of the sample information versus its worth. Pay less for imperfect sample information.

Answer 46

Sample Information in Decision-Making

Question 47

Examining the impact of a change in one or more of the model coefficients on the decision or decisions. If a small change in one of the model coefficients results in a different decision then the data needs to be investigated in more detail. Is important because most model coefficients are estimates Can be used to assess the impact of changes in both the probability estimates, payoff values, and factor rankings

Answer 47

Sensitivity Analysis

Question 48

When doing sensitivity analysis, this helps identify the inputs that, if changed, have the greats impact on the EMV. Also helps to identify the areas where sensitivity analysis is most important and prioritize where time and resources should be applied in refining probability and financial estimates represented in the decision tree.

Answer 48

Tornado Charts

Question 49

a sensitivity analysis technique that allows a decision maker to analyze how the optimal decision strategy changes in response to two simultaneous changes in probability estimates.

Answer 49

Strategy Table

Question 50

A sensitivity analysis technique to graphically show how the optimal decision strategy changes in response to two simultaneous changes in probability estimates.

Answer 50

Strategy Charts

Question 51

A matrix that reports indictor probabilities based actual conditions.

Answer 51

Conditional probability table

Question 52

A process for revising past probabilities using additional prior information.

Answer 52

Bayesian theorem

Question 53

What are the two inputs required for the Bayesian Theorem?

Answer 53

Model requires two inputs: 1 Prior probabilities 2 Conditional probability table

Question 54

What are the two outputs required for the Bayesian Theorem?

Answer 54

Model generates two outputs: 1 Marginal probabilities 2 Revised conditional probabilities

Question 55

Provides a way to incorporate the decision makers attitudes and preferences toward risk and return in the decision analysis process so that the most desirable decision alternative is identified

Answer 55

Utility Theory

Question 56

The theory assumes that these must be used to translate each of the possible payoffs in a decision problem into a nonmonetary measure known as utility.

Answer 56

Utility Function

Question 57

Represents the total worth, value or desirability of the outcome of a decision alternative to the decision maker.

Answer 57

Utility of Payoff

Question 58

Refers to the amount of money that is equivalent in a decision makers mind to a situation that involves uncertainty.

Answer 58

Certainty equivalent

Question 59

Refers to the EMV that a decision maker is willing to give up (or pay) in order to avoid a risky decision.

Answer 59

Risk Premium

Question 60

If the decision maker is risk averse, this can be used as an approximation of the decision maker's actual utility function. Must determine a reasonable value for the risk tolerance parameter

Answer 60

Exponential Utility Function

Question 61

Rigorous definition of problem or issue Comprehensive retrieval of best practices and information (BI) Critical and systematic assessment of evidence using analytics Decision selection and execution Ongoing evaluation of organizational performance

Answer 61

Evidence-Based Decision-Making

Question 62

``` Factors you need to include when doing this: Customer Preferences Analytics Expertise Customer circumstances ```

Answer 62

Evidence-Based Decision-Making

Question 63

If two strategies have the same expected profit, select one with the smaller standard deviation

Answer 63

Risk Averting Behavior

Question 64

What is the probability of exceeding one standard deviation from the mean in a normal distribution?

Answer 64

0.16

Question 65

``` Which one of the following has the most risk based on the given coefficient of variation? 1 2 3 4 ```

Answer 65

4

Question 66

a technique that involves the analysis of a complex decision situation by performing a large number of iterations to determine the probability distribution

Answer 66

Simulation