Chapter 13 (Part A) - Decision Analysis

Question 1

Can be used to develop an optimal strategy when a decision maker is faced with several decision alternatives and an uncertain or risk-filled pattern of future events; Even when a careful ——– ——– has been conducted, the uncertain future events make the final consequence uncertain; The risk associated with any decision alternative is a direct result of the uncertainty associated with the final consequence.

Answer 1

Decision Analysis

Question 2

Good decision analysis includes —- ——– that provides probability information about the favorable as well as the unfavorable consequences that may occur.

Answer 2

Risk Analysis

Question 3

A decision problem is characterized by decision alternatives, states of nature, and resulting payoffs.

Answer 3

Problem Formulation

Question 4

Are the different possible strategies that decision maker can employ.

Answer 4

Decision Alternatives

Question 5

Refer to future events, not under the control of the decision maker, which may occur; Should be defined so that they are mutually exclusive and collectively exhaustive.

Answer 5

States of Nature

Question 6

Is a graphical device showing the relationships among the decisions, the chance events, and the consequences.

Answer 6

Influence Diagram

Question 7

Depict decision nodes.

Answer 7

Squares or Rectangles

Question 8

Depict chance nodes.

Answer 8

Circles or Ovals

Question 9

Depict consequence nodes.

Answer 9

Diamonds

Question 10

Connecting the nodes show the direction of influence.

Answer 10

Lines or Arcs

Question 11

The consequence resulting from a specific combination of a decision alternative and a state of nature is a:

Answer 11

Payoff

Question 12

A table showing payoffs for all combinations of decision alternatives and states of nature is a:

Answer 12

Payoff Table

Question 13

Payoffs can be expressed in terms of: (4)

Answer 13

1. Profit
2. Cost
3. Time
4. Distance

Or any other appropriate measure.

Question 14

Three commonly used criteria for decision making when probability information regarding the likelihood of the states of nature is unavailable are: (3)

Answer 14

1. Optimistic Approach
2. Conservative Approach
3. Minimax Regret Approach

Question 15

Would be used by an optimistic decision maker.

Answer 15

Optimistic Approach

Question 16

Chosen in Optimistic Approach:

Answer 16

Decision with the Largest Possible Payoff

Question 17

If the payoff table was in terms of cost, this would be chosen:

Answer 17

Decision with the Lowest Cost

Question 18

Would be used by a conservative decision maker.

Answer 18

Conservative Approach

Question 19

For each decision the minimum payoff is listed and then the decision corresponding to the maximum of these minimum payoffs is selected.

Answer 19

Minimum Possible Payoff is Maximized

Question 20

If the payoff was in terms of costs, the maximum costs would be determined for each decision and then the decision corresponding to the minimum of these maximum costs is selected.

Answer 20

Maximum Possible Cost is Minimized

Question 21

The minimax regret approach requires the construction of a:

This is done by calculating for each state of nature the difference between each payoff and the largest payoff for that state of nature; Then using this, the maximum regret for each possible decision is listed.

Answer 21

Regret Table/Opportunity Loss Table

Question 22

The decision chosen is the one corresponding to the: (Minimax Regret Approach)

Answer 22

Minimum of the Maximum Regrets

Question 23

If probabilistic information regarding the states of nature is available, one may use the:

Here the expected return for each decision is calculated by summing the products of the payoff under each state of nature occurring. The decision yielding the best expected return is chosen.

Answer 23

Expected Value (EV) Approach

Question 24

Is the sum of weighted payoffs for the decision alternative.

Answer 24

Expected Value of a Decision Alternative

Question 25

Is a chronological representation of the decision problem.

Answer 25

Decision Tree

Question 26

Each decision tree has two types of nodes: Corresponds to the states of nature.

Answer 26

Round Nodes

Question 27

Each decision tree has two types of nodes: Corresponds to the decision alternatives.

Answer 27

Square Nodes

Question 28

Leaving each round node represent the different states of nature while the -------- leaving each square node represent the different decision alternatives. At the end of each limb of a tree are the payoffs attained from the series of -------- making up that limb.

Answer 28

Branches