Decision-Making Strategies Quiz
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Questions and Answers

What is the Expected Monetary Value (EMV) for the Residential alternative?

  • $1300
  • $1500
  • $1000
  • $1240 (correct)

    • Which alternative has the smallest Expected Opportunity Loss (EOL)?

  • Residential (correct)
  • Commercial 1
  • Both Commercial 1 and Commercial 2
  • Commercial 2

    • What is the expected value of perfect information (EVPI) based on the information provided?

  • $450
  • $250 (correct)
  • $300
  • $600

    • Which alternative yields the highest EMV among the commercial options?

    <p>Commercial 2</p> Signup and view all the answers

    What probability is assigned to the occurrence of a medium-sized shopping center?

    <p>0.5</p> Signup and view all the answers

    What does the Expected Payoff under Certainty (EPC) represent?

    <p>The weighted average of the best payoffs under certainty</p> Signup and view all the answers

    What is the value of the Expected Value of Perfect Information (EVPI) based on the given calculations?

    <p>$130</p> Signup and view all the answers

    Which of the following best describes the purpose of using decision trees in decision-making?

    <p>To clarify sequential decisions and visualize uncertainties</p> Signup and view all the answers

    What is meant by Additional (Sample) Information in decision-making?

    <p>Improving decision accuracy while acknowledging extra costs</p> Signup and view all the answers

    If a medium-sized center is developed, which choice would the developer make?

    <p>Residential for $1600</p> Signup and view all the answers

    What does the MINIMAX REGRET strategy focus on?

    <p>Minimizing the maximum potential regret</p> Signup and view all the answers

    In the context of the opportunity loss table, what does OL stand for?

    <p>Opportunity Loss</p> Signup and view all the answers

    How is the best payoff calculated in the REALISM approach?

    <p>By multiplying the best outcome by coefficient α</p> Signup and view all the answers

    What is the purpose of the coefficient of optimism (α) in the REALISM approach?

    <p>To decide how much weight to give to best and worst payoffs</p> Signup and view all the answers

    What averaging method is used in the EQUAL LIKELIHOOD approach?

    <p>Simple average of each row's payoffs</p> Signup and view all the answers

    When can partial uncertainty estimates be applied in decision-making?

    <p>When probabilities can be estimated or given</p> Signup and view all the answers

    What is a requirement for the probabilities assigned to states of nature?

    <p>They must sum to exactly 1.00</p> Signup and view all the answers

    What outcome does the MINIMAX REGRET table show for 'Commercial 2' under 'Medium Center'?

    <p>1200</p> Signup and view all the answers

    What does the Efficiency of Sample Information (ESI) indicate when it is closer to 1?

    <p>Sample information is close to perfect.</p> Signup and view all the answers

    How is the Expected Value of Perfect Information (EVPI) calculated in the example?

    <p>By taking the difference between EPC and EMV.</p> Signup and view all the answers

    In the context of the market test results, what does the value 0.80 represent?

    <p>The percentage chance of market test accuracy for a strong market.</p> Signup and view all the answers

    What is the relationship between EVSI and EVPI in determining the efficiency of sample information?

    <p>Efficiency is found by dividing EVSI by EVPI.</p> Signup and view all the answers

    Given that the market survey predicts limited acceptance 70% of the time when there is limited acceptance, how can this value influence decision-making?

    <p>It may mislead decision-makers regarding weak market signals.</p> Signup and view all the answers

    What is the revised probability of a strong market given that a market test shows a strong market?

    <p>0.95</p> Signup and view all the answers

    What is the joint probability of a strong market given the prior probability of 0.2 and a conditional probability of 0.7?

    <p>0.14</p> Signup and view all the answers

    What does sensitivity analysis in decision making under risk aim to understand?

    <p>The effect of estimation errors on decisions</p> Signup and view all the answers

    What is the marginal probability of a strong market when the market test shows a weak market?

    <p>0.41</p> Signup and view all the answers

    Which statement about the actual probabilities given a strong market is incorrect?

    <p>The conditional probability of a weak market is 0.3.</p> Signup and view all the answers

    Study Notes

    Minimax Regret

    • Opportunity loss is the difference between the best possible payoff and the actual payoff for each alternative.
    • The minimax regret strategy chooses the alternative with the smallest maximum loss.
    • This method is useful when decision makers are risk-averse and have limited information about the probability of each state of nature.

    Realism

    • Realism uses a weighted average of the best and worst payoffs for each alternative.
    • This method incorporates the decision maker's degree of optimism, using a coefficient of optimism that ranges from 0 to 1.
    • 0 indicates complete pessimism (focuses on the worst possible payoff) and 1 indicates complete optimism (focuses on the best possible payoff).

    Expected Value of Perfect Information (EVPI)

    • EVPI represents the maximum amount a decision maker would be willing to pay for perfect information.
    • It measures the difference between the expected value under certainty and the expected value without perfect information.

    Expected Monetary Value (EMV)

    • EMV calculates the average payoff for each alternative, assuming a specific probability distribution for the states of nature.
    • It is used when probabilities are available to estimate the expected value for each alternative.

    Decision Trees

    • Decision trees are graphical representations of sequential decisions with uncertain outcomes.
    • Events (uncertain outcomes) are represented by circles, and decision nodes are represented by squares.
    • The decision tree can be used to analyze and compare different possible decisions and their potential outcomes.

    Expected Value of Sample Information (EVSI)

    • EVSI measures the additional value obtained from collecting more information before making a decision.
    • It estimates the increase in expected value due to acquiring additional information.

    Sensitivity Analysis

    • Sensitivity analysis explores the impact of changes in estimated values on the decision.
    • It helps determine how robust the initial decision is to potential inaccuracies or uncertainties in the input data.

    Computing Probabilities

    • Bayesian probability updates prior probabilities based on new information.
    • Conditional probabilities, which represent the reliability of the sampling device, are used to update the prior probabilities.
    • The result is a set of revised probabilities reflecting the updated information.

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    Related Documents

    Decision Theory Chapter 1 PDF

    Description

    Test your knowledge on various decision-making strategies including Minimax Regret, Realism, and Expected Value of Perfect Information (EVPI). This quiz covers the concepts, applications, and implications of these techniques in risk-averse decision-making scenarios.

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