Risk and Uncertainty (2) Flashcards
What is a maximin decision rule?
A decision-maker should select alternative that offers the least unattractive worst outcome (e.g. alternative that maximises the minimum profits)
What are maximin decisions?
Maximise the minimum return of each decision
Apply to a risk averse decision maker
Limitations of maximin?
Does not consider probability of each outcome occurring
Is conservative by trying not to maximise profit
What is a maximax criterion?
Looks at the best possible results. Decision should provide the maximum possible profit
Maximax decision characteristics?
Aim for best possible return
Apply for a risk-seeking decision-maker
Limitations of maximax?
Does not consider probability of each outcome occuring
Is overly optimistic
What is the minimax regret rule/
Aims to minimise the regret from making the wrong decision
What is meant by regret/
Opportunity lost through making the wrong decision
What is a decision tree?
A pictoral method of showing a sequence of interrelated decisions and their expected outcomes
What is rollback analysis in a decision tree/
Evaluate from right to left
Benefit of using a decision tree?
Clearly shows all decisions and uncertain events and how they are interrelated
Problems with using a decision tree
Based on expected value
Heaviliy dependent on probabilities used
Oversimplification
What is perfect information?
Information that predicts with 100% accuracy what the outcome situation will be
What does having perfect information remove?
All doubt and uncertainty from a decision
Limitations of using perfect information?
useful information is never perfect
