Theory for the Exam Flashcards

1
Q

Difference between lexicographic approach and Additive method

A

Lexicographic approach is logical and simple but does not allow for trade offs the same way the additive method does.
The additive method also considers the DM risk preference

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2
Q

Five Os Method

A
Useful checklist for grouping and clustering
Owner - Decision maker, Shareholders
Objectives - criteria
Options - alternatives
Occasions - context, constraints
Odds - uncertainties
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3
Q

Define Utility

A

The amount of satisfaction that a consumer receives by consuming a good or service
Helps quantify the DM risk preference

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4
Q

Von Neumann and Morgenstern Axioms

A
5 in total
Complete Ordering
Continuity 
Independence 
Unequal Probability 
Compound Lottery
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5
Q

Order Axiom (Complete Ordering)

A

If r1 > r2
and r2 > r3
then r1 > r3

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6
Q

Independence Axiom

A

Given r1 and r2 are indifferent and any reward r3 and probability p, the following lotteries are indifferent

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7
Q

Posterior Probabilities

A

flipping of the formulas you already have

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8
Q

Significance of zeros in Markov chain matrix

A

Represent transitions that cannot be made. It is impossible to go from one to the other

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9
Q

Simons 1976 Satisficing model

A

Simon 1976
Set a satisfactory level of performance for the most important attribute
Eliminate alternatives
Repeat steps for next most important alternative
Can model on an graph with criteria on each axis
Satisfice because unable to maximise
Useful at preliminary stages and routine decisions
Based on bounded rationality
is NOT a prescriptive model

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10
Q

Risk taking

A

Convexed

CME > EMV

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11
Q

Risk Averse

A

Concaved

CME < EMV

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12
Q

5 criteria for additive function

A
5 in total
Preferential Independence
Complete Compensation
Corresponding trade off
Interval scale,
Scaling constants
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13
Q

Maximax Benefit

A

The “highest” maximum Benefit
Risk taking
Optimistic

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14
Q

Maximin

A

The “highest” minimum benefit
Risk Averse
Pessimistic

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15
Q

Minimax Regret Criteria

A

The “lowest” maximum regret
Opportunity loss
Pessimistic

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16
Q

Unichain

A

There is only one single recurrent class. All transient states transition into this.

17
Q

Aperiodic

A

If t = 0 or no such a t can be found

Possible to return to itself with a positive probability

18
Q

Completely ergodic

A

Unichain and Aperiodic

19
Q

Local Scale

A

Defines possible outcomes in relation to the available alternatives given in the problem
Lazy approach

20
Q

Global Scale

A

Using all possible outcomes in similar contexts, outcomes which could realistically occur

21
Q

Hurwicz Criterion

A

Degree of optimism

Realistic view

22
Q

Laplace Criterion

A

All states are equally likely

23
Q

Continuity Axiom

A

If r1 > r2 and r2 > r3, then there exists p which makes a lottery of r1 (which will defo occur) indifferent to a lottery of r2 and r3

24
Q

State is Accessible?

A

probability going from one to another is greater than 0

25
Q

State is Communicative?

A

State i accessible from state j and state j accessible from state i

26
Q

State is reflexive?

A

State communicates with itself

27
Q

Sate is symmetric?

A

If state i communicates with state j, then state j communicates with state i

28
Q

State is transitive?

A

if state i communicates with state j, and state j communicates with state k, then state i communicates with state k

29
Q

Transient state

A

probability of returning to a state once it has left is <1 (or may never return)

30
Q

Recurrent state

A

You will definitely return to the state once you have left

31
Q

Absorbing state

A

Special type of recurrent state

Once you enter the state, you will never leave

32
Q

Prospect theory

A

Losses and gains are valued differently, and thus individuals make decisions based on perceived gains instead of perceived losses
Has a turning point

33
Q

Initial screening methods

A

Satisficing levels
Dominance
Disjunctive