Unit 3- expected value

Question 1

Decision making model steps

Answer 1

1. identify the problem
2. Establish decision criteria
3. Weight decision criteria
4. generate alternatives.
5. Evaluate the alternatives
6. choose the best alternative.
7. implement the decision.
8. evaluate the decision.

Question 2

Risk

Answer 2

measurable uncertainty

Question 3

uncertainty

Answer 3

unmeasurable risk

Question 4

Expected value

Answer 4

the SUM of all possible outcomes multiplied by their probability occurrence

Question 5

Calculating expected value

Answer 5

P1V1 + P2V2 + P3*V3 …
Pi = Probability of Outcome i
Vi = Value of Outcome i
n = the number of possible Outcomes

multiply probability times payoff. then add across the options such as the corresponding probabilities add to 1

Question 6

state of nature node

Answer 6

a possible outcome on a decision tree that would be out of the decision markers control

Question 7

decision tree

Answer 7

tool used to visualize important aspects of a problem.

1. probabilities of events
2. posible events
3. alternative of events