Decision Analysis 01 (Oct 7) Flashcards
Why are decision problems difficult?
- Complexity
- Uncertainty
- Multipleobjectives
- Different perspectives may lead to different solutions
Elements of Decision Problems
- Values and Objectives
- Decisions to make
- Uncertain events
- Consequences
Values and Objectives
* Value: …
* Objective: …
* An individual’s objectives taken together make up …
* A special objective: making money
– Very frequently a … – But not always (i.e. monetary value of human life ?)
* The decision context: … contexts go together
things that matter to you
specific thing than you want to achieve
his/her values
proxy objective for other objectives
objectives and decision
Decisions to make
* Choose among multiple alternatives (what are the alternatives?)
* Can always consider: (think options)
– Doing nothing
– Wait to obtain more information
– Hedging against possible losses
Sequential decisions
* Maintaining dollar – TL investment portfolio – Sell or buy dollars ? – today
– Sell or buy ? – tomorrow…
- Introducing a new product
– Introduce or not ?
– Produce or outsource ?
– How much to invest in marketing ? – How to price ?
Uncertain Events
* Decision problems are usually complicated because …
– Investing in the stock market!
– Weather impacts sales, agricultural production etc.
* There may be several uncertain events but only those that …
– This is sometimes complicated, there’s some empirical evidence that financial markets tend to go up when weather is better
* Sometimes …
– Investing in the stock market after Central Bank’s latest interest rate announcement
of uncertainty
have an impact on your decision should matter.
resolved uncertainty provides information
Consequences
* What is …?
* What is the planning horizon?
– The horizon beyond which … on the current decision problem.
* Valuing the consequences:…
gained/lost after last decision is made and last uncertainty is resolved
events and decisions do not have an influence
Monetary vs Non-Monetary values
