Week 5- Decision making under uncertainty

Question 1

what type of person is a calculator?

Answer 1

Someone who gathers data and chooses probabilistically

Question 2

What type of person is a sore loser?

Answer 2

Someone who avoids the regret of making the wrong decision

Question 3

what are the four types of decisions?

Answer 3

Certain decisions
Uncertain decisions
Risky decisions
Competitive decisions

Question 4

what are certain decisions?

Answer 4

Decisons that are only made using known information in deterministic scenerios

Question 5

what are uncertain decisions?

Answer 5

When the values and probabilities of the scenerio is unknown (eg. forecasting demand for a wholly new product)

Question 6

what are risky decisions?

Answer 6

when the values and probabilities of scenerios is known ( eg. when you can forecast results using past history)

Question 7

what are the four types of person are there?

Answer 7

Optimist
Pessimist
Calculator
Sore Loser

Question 8

what are competitive decisions?

Answer 8

Decisions wher the outcome depends on other parties choices (which are also perhaps unknown) eg. prisoners dilemma

Question 9

What is the maximax decision rule?

Answer 9

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)

Question 10

What is the maximin rule?

Answer 10

when you determine the lowest possible payoff for each decision and then chosse the best worst alternative. Pessimistic and “gurantees minimum return”

Question 11

what is the laplace rule?

Answer 11

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

Question 12

what is the minimax/regret rule?

Answer 12

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.

Question 13

what are decision alternatives?

Answer 13

the choice that you are actually going to make

Question 14

what are the states of nature?

Answer 14

the different scenarios that can take place within a decision alternative

Question 15

what is the Hurwicz rule?

Answer 15

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

Question 16

what is the maximum liklihood?

Answer 16

When you choose the alternative with the highest payoff for the state of nature with the highest probablity

Question 17

what is the maximum liklihood?

Answer 17

When you choose the alternative with the highest payoff for the state of nature with the highest probablity

Question 18

what are the three decision rules that are used when making decisions with probabilities attached?

Answer 18

• Expected Monetary value (EMV)
• Expected Opportunity loss (EOL)
• Expected value of perfect information (EVPI)

Question 19

How do you calculate Expected monetary value(EMV) ?

Answer 19

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

Question 20

How do you calculate Expected opportunity loss (EOL) ?

Answer 20

Calculate the regret for each payoff and then add them together. The alternative with the lowest score is the best alternative

Question 21

how do you calculate the expected value of perfect information?

Answer 21

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