Unit 4: Expected Value (19% of the Assessment) Flashcards
Abbreviation for decision-making method with several states of nature and known likelihoods
emv
Similar to a decision tree except that it uses a table instead of a graphical representation of the data
pay off table
Step 8 of the decision-making model
Evaluate the decision
Step 1 of the decision-making model
Identify the problem
A possible outcome on a decision tree that would be out of the decision maker’s control
State of nature node
A point where one of several alternatives can be selected
Decision point
A non-quantifiable value because the future events are not predictable
uncertainty
Step 4 of the decision making model
generate alternatives
Tool that can be used to visualize important aspects of a problem
Decision tree
Step 5 of the decision-making model. Do this to the alternatives.
Evaluate
Step 7 of the decision-making model. Do this to the decision.
Implement
Step 2 of the decision - making model. Do this to the criteria.
Establish
Step 6 of the decision - making model. Do this to the best alternative.
Choose
Step 3 of the decision - making model. Do this to the criteria.
Weigh
Known possibility measured by its probability of occurrence.
Risk
A non-quantifiable value because the future events are not predictable
uncertainty
A point where on e of several alternatives can be selected
decision point
A possible outcome on a decision tree that would be out of the decision maker’s control
state of nature node
Known possibility measured by its probability of occurrence
risk
Method used for decision making when the risks involved in a decision situation have several states of nature and the likelihood, or probability, of each state is known
expected monetary value
Similar to a decision tree except that it uses a table instead of a graphical representation of the data
payoff table
Step 1 of the decision-making model
identify the problem
Step 2 of the decision - making model
establish decision criteria
Step 3 of the decision-making model
weigh decision criteria
Step 4 of the decision-making model
generate alternatives
Step 5 of the decision-making model
evaluate the alternatives
Step 6 of the decision-making model
choose the best alternative
Step 7 of the decision-making model
implement the decision
Step 8 of the decision-making model
evaluate the decision
Tool that can be used to visualize important aspects of a problem
decision tree
Ts4U is opening a new location for an outlet store. They are deciding between either building a new warehouse on the outskirts of town or remodeling a building inside the city limits. The following decision tree shows the probability for strong and weak sales at each of the two locations under consideration, as well as the expected payoffs at each of them. What is the expected payoff for Building a New Warehouse?
Building a New Warehouse
Strong Payoff: 70% - $265,425
Weak Payoff: 30% - $20,150
Remodel a Building in the City
Strong Payoff: 80% - $225,150
Weak Payoff: 20% - $50,765
Answer: $191,842.50 $265,425*70% + $20,150*30% -->265,425*0.70 + 20,150*0.30 --->185,797.50 + 6,045.00 ---->191,842.50
Ts4U is opening a new location for an outlet store. They are deciding between either building a new warehouse on the outskirts of town or remodeling a building inside the city limits. The following decision tree shows the probability for strong and weak sales at each of the two locations under consideration, as well as the expected payoffs at each of them. What is the expected payoff for Remodeling a Building in the City?
Building a New Warehouse
Strong Payoff: 70% - $265,425
Weak Payoff: 30% - $20,150
Remodel a Building in the City
Strong Payoff: 80% - $225,150
Weak Payoff: 20% - $50,765
Answer: $190,273.00 $225,150*80% + $50,765*20% -->225,150*0.80 + 50,765*0.20 --->180,120.00 + 10,153.00 ---->190,273.00
