Week 5- Decision making under uncertainty Flashcards
what type of person is a calculator?
Someone who gathers data and chooses probabilistically
What type of person is a sore loser?
Someone who avoids the regret of making the wrong decision
what are the four types of decisions?
Certain decisions
Uncertain decisions
Risky decisions
Competitive decisions
what are certain decisions?
Decisons that are only made using known information in deterministic scenerios
what are uncertain decisions?
When the values and probabilities of the scenerio is unknown (eg. forecasting demand for a wholly new product)
what are risky decisions?
when the values and probabilities of scenerios is known ( eg. when you can forecast results using past history)
what are the four types of person are there?
Optimist
Pessimist
Calculator
Sore Loser
what are competitive decisions?
Decisions wher the outcome depends on other parties choices (which are also perhaps unknown) eg. prisoners dilemma
What is the maximax decision rule?
When you determine the best possible payoff for each decision and pick the alternative with the highest payoff. This rule completly ignores any losses linked to the choosing the decision with the highest payoff)
What is the maximin rule?
when you determine the lowest possible payoff for each decision and then chosse the best worst alternative. Pessimistic and “gurantees minimum return”
what is the laplace rule?
the best average payoff out of all the alternatives wins. Calculated by adding all the payoffs together and dividing by how many there are. eg. 30+30=6/2=30
what is the minimax/regret rule?
the best payoffs from each state of nature - the payoffs for the other alternatives under the same state of nature. Choose the alternative with the smallest total.
what are decision alternatives?
the choice that you are actually going to make
what are the states of nature?
the different scenarios that can take place within a decision alternative
what is the Hurwicz rule?
Select a “ co-efficient of optimism, if very optimistic then select closer to 1 and if very pessimistic then select near to 0. If you selected 0.6 then you would multiply your most favoured decision by 0.6 and your least favourite by 0.4. Then add the two results together and choose the alternative with the highest number
what is the maximum liklihood?
When you choose the alternative with the highest payoff for the state of nature with the highest probablity
what is the maximum liklihood?
When you choose the alternative with the highest payoff for the state of nature with the highest probablity
what are the three decision rules that are used when making decisions with probabilities attached?
- Expected Monetary value (EMV)
- Expected Opportunity loss (EOL)
- Expected value of perfect information (EVPI)
How do you calculate Expected monetary value(EMV) ?
Multiply the expected payoff with the probability of it happening for each scenario. Then add them together. Repeat for each decision. the highest total is best alternative.
eg. 0.230+ 0.880
How do you calculate Expected opportunity loss (EOL) ?
Calculate the regret for each payoff and then add them together. The alternative with the lowest score is the best alternative
how do you calculate the expected value of perfect information?
Calculate the Expected profit of a perfect predictor (EPPP) by multiplying the highest profit in each state of nature by its probability.
EVPI = EPPP - EMV
The EVPI should always equal the EOL
