Expected value

Question 1

4 limitations of expected value

Answer 1

its a long term average, so wont be reached in the short term
dependent on the probability estimates
the EV might not represent a single possible outcome
ignores range of possible outcomes

Question 2

what is the formula for EV

Answer 2

sum of probable outcomes

Question 3

Whats the maximin decision rule

Answer 3

that a decision maker should select the alternative that offers the least unattractive worst outcome. this would mean choosing the alternative that maximises the minimum profits

Question 4

what kind of approach is maximin

Answer 4

risk averse/ pessimistic

Question 5

whats the maximax decision rule

Answer 5

maximax means maximise the maximum profit. the decision with this rule is to choose the option that would provide the maximum possible profit

Question 6

what kind of approach is maximax

Answer 6

risk seeker, optimistic

Question 7

what is the minimax regret rule

Answer 7

the minimax regret rule aims to minimise the regret from making the wrong decision. regret is the oppurtunity lost through making the wrong decision.

Question 8

what does a square mean in a decision tree

Answer 8

decision

Question 9

what does a circle mean in a decision tree

Answer 9

outcome

Question 10

what do you do when you see a circle on a decision tree

Answer 10

calculate EV

Question 11

what do you do when you see a Square on a decision tree

Answer 11

compare alternatives (choose highest)