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Questions and Answers
What must the decision maker estimate first to apply the concept of expected values as a decision-making criterion?
What must the decision maker estimate first to apply the concept of expected values as a decision-making criterion?
- Potential revenue from each state of nature
- Opportunity loss associated with each state of nature
- Probability of occurrence of each state of nature (correct)
- Cost of each decision alternative
In which decision-making criterion is it assumed that no information regarding the likelihood of the states of nature was available?
In which decision-making criterion is it assumed that no information regarding the likelihood of the states of nature was available?
- Decision making under uncertainty
- Equal likelihood criterion (correct)
- Expected opportunity loss
- Expected value
What is often possible for a decision maker to know to their occurrence, according to the text?
What is often possible for a decision maker to know to their occurrence, according to the text?
- The current market trends
- The potential losses associated with each decision alternative
- Exact revenue from each state of nature
- The probabilities of future states and their occurrence (correct)
Which metric considers the opportunity loss associated with a decision in decision-making under uncertainty?
Which metric considers the opportunity loss associated with a decision in decision-making under uncertainty?
When using the concept of expected values as a decision-making criterion, what needs to be computed for each decision alternative?
When using the concept of expected values as a decision-making criterion, what needs to be computed for each decision alternative?
What is a decision criterion closely related to expected value?
What is a decision criterion closely related to expected value?
In the context of decision making under uncertainty, what does the Expected Opportunity Loss measure?
In the context of decision making under uncertainty, what does the Expected Opportunity Loss measure?
Which of the following is NOT presented as an option when making decisions with probabilities?
Which of the following is NOT presented as an option when making decisions with probabilities?
What is calculated by multiplying the value of each outcome by its corresponding probability?
What is calculated by multiplying the value of each outcome by its corresponding probability?
Which measure helps in assessing the potential loss that could be incurred due to a decision?
Which measure helps in assessing the potential loss that could be incurred due to a decision?
In decision making with probabilities, what does the Expected Value represent?
In decision making with probabilities, what does the Expected Value represent?
What is the Minimax Regret Criterion used for in decision-making?
What is the Minimax Regret Criterion used for in decision-making?
How are payoffs calculated under the Minimax Regret Criterion?
How are payoffs calculated under the Minimax Regret Criterion?
What is the purpose of the Expected Value of Perfect Information?
What is the purpose of the Expected Value of Perfect Information?
In decision-making, what does multiplying probabilities by regret help to determine?
In decision-making, what does multiplying probabilities by regret help to determine?
How is additional information beneficial in making better decisions?
How is additional information beneficial in making better decisions?
What does the Minimax Regret Criterion consider when evaluating decision outcomes?
What does the Minimax Regret Criterion consider when evaluating decision outcomes?
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Study Notes
Decision Making with Probabilities
- The minimax regret criterion is used to evaluate decision outcomes by multiplying probabilities by the regret (opportunity loss) for each outcome.
- The expected opportunity loss is calculated by subtracting the payoffs under each state of nature from the maximum possible payoff.
Calculating Expected Value
- To apply the concept of expected values as a decision-making criterion, the decision maker must first estimate the probability of occurrence of each state of nature.
- The expected value is computed by multiplying the probability of each state of nature by the payoff for each decision alternative.
Example Problem
- The problem involves choosing between five options: buying a warehouse for lease, buying an office building for lease, buying stocks, saving in a time deposit, or buying a car for rent.
- The expected value for each option is calculated by multiplying the probability of good economic conditions (35%) by the payoff under good conditions, and the probability of poor economic conditions (65%) by the payoff under poor conditions.
Expected Opportunity Loss
- Expected opportunity loss is a decision criterion closely related to expected value.
- It is calculated by multiplying the probability of each state of nature by the opportunity loss for each decision alternative.
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