Week 8 - Decision Analaysis Tutorial 3

Question 1

What is ‘perfect information’?

Answer 1

information free from any mistakes it is 100% reliable

Question 2

What is true of ‘Perfect information ‘ that detracts from its usefulness?

Answer 2

Information can never be perfect, there is always a chance that it could be wrong

Question 3

Considering that perfect information can never be 100% reliable. What is its use?

Answer 3

It can be used to calculate the money we should be willing to pay for information.

If the value that ‘perfect information’ could provide is lower than the cost of the ‘imperfect information’ we shouldn’t purchase it.

Question 4

In a market research context, if the research identified a negative demand and the demand as in fact low, what would this signify?

Answer 4

That the information is perfect.

Question 5

What value is assigned to the value of perfect information when it identifies the correct outcome?

Answer 5

1

Question 6

Once the expected value with perfect information has been claucled, we can then comapre this…

Answer 6

To the expected value without any information.

If the gain is more than the cost, we should choose market research.

Question 7

What is the ‘perfect gain’ and how is it calculated?

Answer 7

The maximum that nay piece of market research could be worth.

Perfect Gain = Value with PI - Value without PI

Question 8

What is meant by the term ‘Efficiency of information’ and how is it calculated?

Answer 8

Efficiency of information compares the actual gain from imperfect information to the gain using perfect information.

Efficiency of information = Actual Gain / Perfect Gain

Question 9

Efficiency of information can be used as another metric for comparing…

Answer 9

How good a market research company is compared to perfect information.

Question 10

Under what circumstance is it okay to use monetary values in decision a analysis? And why is this?

Answer 10

When the difference between values is not too extreme.

If values are very dissimilar but have the same EV can result in a sub optimal solution being chosen.

Question 11

What is the solution to decision analysis when monetary values are vastly different?

Answer 11

Use utility

Question 12

What is Utility?

Answer 12

A way of calculating Expected Value whilst taking into account the decision makers attitude to risk.

Question 13

What scale is Utility measured on?

Answer 13

Usually; 0-1

Sometimes; 0-100

Question 14

By convention, a decision with a higher utility is..

Answer 14

More desirable

Question 15

A decision with a lower utility is…

Answer 15

Less desirable

Question 16

How is utility demonstrated on a graph?

Answer 16

Through Utility Curves

Question 17

When the utility curve is linear, the deacon maker is said to be…

Answer 17

Neutral

Question 18

When a utility curve is linear, ….. is equal to….

Answer 18

Expected utility is equal to Expected value

Question 19

When the utility curve is under the risk neutral line the decision maker is said to be…

Answer 19

Risk takers \

Question 20

If the utility curve is above the risk neutral line the decision maker is said to be…

Answer 20

Risk adverse

Question 21

When calculating Expected Utility on a decision tree, it is important to subtract…

Answer 21

Any costs (market research) from the far right hand side values before working back through the table

Question 22

What are the two options for finding the Utility values for many payoffs?

Answer 22

1. Comparison method (Evaluate a few plots on the utility curve to find the utility)
2. Use a suitable function
   Square root of x = Risk Adverse
   XSquared = Risk taker

Question 23

When dealing with decisions without monetary value, we can still use decision analysis so long as…

Answer 23

We can tell when one outcome is better than another

Question 24

When using decision analysis for non-monetary decisions, what is assigned to the best and worst case scenario?

Answer 24

1 and 0 respectively

Question 25

Once the utilities for a non-monetary decision have been affirmed, we can then…

Answer 25

Calculate the Expected Utility (using the same method as for Expected value)