Payoff Table Analysis in Decision Making
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Questions and Answers

What is the payoff for Alternative 1 if the market is unfavorable?

  • 60,000
  • 0
  • 100,000
  • 5,000 (correct)

What is the probability of an unfavorable market according to the investor's information?

  • 0.4
  • 0.45
  • 0.35
  • 0.6 (correct)

How much does the study cost the investor?

  • 5,000 JD (correct)
  • 10,000 JD
  • 7,500 JD
  • 2,500 JD

What is the expected probability of an unfavorable market given that the study results are positive?

<p>0.45 (A)</p> Signup and view all the answers

If the investor conducts the study and receives negative results, which alternative provides the highest maximum expected monetary value?

<p>Do nothing (D)</p> Signup and view all the answers

What is the probability that the study will yield negative results?

<p>60% (B)</p> Signup and view all the answers

What is the expected monetary value for Alternative 2 in an unfavorable market?

<p>-30,000 (A)</p> Signup and view all the answers

What effect does conducting the study have on the investor’s decision-making?

<p>It provides more accurate market probabilities. (A)</p> Signup and view all the answers

What is the expected monetary value of launching the product if the company decides not to conduct the study?

<p>$3.6 million (C)</p> Signup and view all the answers

What is the expected value of perfect information (EVPI) for the manufacturing company?

<p>$1.50 (D)</p> Signup and view all the answers

What would be the minimum expected opportunity loss (EOL) for the manufacturing company?

<p>$1.80 (D)</p> Signup and view all the answers

Which process has the lowest unit cost at low demand level?

<p>Process C (C)</p> Signup and view all the answers

In terms of profit per unit at high demand, which policy is superior?

<p>Policy A (A)</p> Signup and view all the answers

What decision would an optimist likely make given the alternatives presented?

<p>Choose Alternative 2 (B)</p> Signup and view all the answers

Which alternative would be chosen using the regret criterion based on the first payoff table?

<p>Alternative 3 (B)</p> Signup and view all the answers

What is the total expected monetary value if the study yields positive results?

<p>30,250 JD (B)</p> Signup and view all the answers

Given the probabilities, what is the expected outcome for conducting a study?

<p>Negative results have a high likelihood of occurring (C)</p> Signup and view all the answers

If the investor decides to do nothing after conducting the study, what will be his outcome?

<p>0 JD gain (C)</p> Signup and view all the answers

Which strategy should the company choose if they want to maximize their potential profit under strong market conditions?

<p>Strategy A (A)</p> Signup and view all the answers

Using the minimax regret criterion, which crop should the farmer choose based on potential yield?

<p>Corn (A)</p> Signup and view all the answers

What is the expected monetary value of launching the product if the market research results are positive?

<p>$7.2 million (A)</p> Signup and view all the answers

What is the profit in thousands of dollars for Strategy B under weak market conditions?

<p>150 (B)</p> Signup and view all the answers

If the company does not conduct the market research study, what expected profit can be associated with launching the product in the case of low demand?

<p>$-2 million (A)</p> Signup and view all the answers

Which crop yields the highest potential bushels per acre under wet weather conditions?

<p>Wheat (D)</p> Signup and view all the answers

What happens to the probability of high demand if the market study results are negative?

<p>It decreases to 30% (A)</p> Signup and view all the answers

Which strategy offers the highest potential profit in a moderate market condition?

<p>Strategy B (A)</p> Signup and view all the answers

What is the maximum expected monetary value if the investor chooses not to conduct the study?

<p>$36,000 (D)</p> Signup and view all the answers

What is the expected value of perfect information (EVPI) based on the given payoff table?

<p>$200 (A)</p> Signup and view all the answers

What is the minimum expected opportunity loss value based on the alternatives provided?

<p>$0 (C)</p> Signup and view all the answers

What is the range of P values for alternative 1 using sensitivity analysis?

<p>0.3 to 0.7 (B)</p> Signup and view all the answers

What P value range is applicable for alternative 2 based on sensitivity analysis?

<p>0.2 to 0.5 (C)</p> Signup and view all the answers

What is the calculated risk associated with doing nothing based on the provided information?

<p>Zero expected outcomes (A)</p> Signup and view all the answers

When considering the three alternatives, which one yields the highest payoff in a good economy?

<p>Alternative 1 (D)</p> Signup and view all the answers

What is the loss experienced in a poor economy for Alternative 1?

<p>$60,000 (B)</p> Signup and view all the answers

Which alternative results in the least negative payoff in a poor economy?

<p>Alternative 2 (C)</p> Signup and view all the answers

Which of the following alternatives has the highest negative payoff under all scenarios?

<p>Alternative 3 (C)</p> Signup and view all the answers

Flashcards

Optimist's Decision

Choosing the alternative with the highest possible payoff, without considering potential losses or the worst-case scenario, representing optimistic or hopeful thinking.

Regret Criterion

A decision-making method where the decision-maker identifies the potential regret associated with each alternative by comparing the payoff for each choice with the highest payoff within each state of nature..

Payoff Table

A table that shows the potential payoffs for different alternatives under various states of nature, providing a complete picture of possible outcomes in a decision-making process.

Expected Monetary Value (EMV)

The average payoff expected from a specific alternative in decision-making under uncertainty. It is calculated by multiplying each possible payoff by its probability and summing the results. It's not the same as Actual Monetary Value.

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Conditional Probability

The probability of an event occurring given that another event has already occurred. Used for calculating probabilities based on existing knowledge or outcomes.

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Expected Monetary Value (EMV)

The expected value of a decision, considering the possible outcomes and their probabilities.

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Payoff Table

A table showing the possible outcomes (payoffs) of different investment alternatives under various market conditions.

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Favorable Market

A state of the market where conditions are good for investment.

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Unfavorable Market

A state of the market where conditions are bad for investment.

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Study (Investment)

Additional research that aims to enhance the prediction of the future market state (positive or negative) of the investment opportunity.

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Negative Study Result

The outcome of a market analysis that points toward bad investment opportunities.

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Probability of Unfavorable Market | Positive Study

The chance of an unfavorable market, given a positive study outcome.

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Probability of Favorable Market | Negative Study

The chance of a favorable market, given a negative study outcome.

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Maximum Expected Monetary Value (Negative Study)

The best possible return from all available options given that the study showed negative results.

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Maximum Expected Monetary Value (EMV)

The highest potential monetary gain (or lowest potential loss) if a certain course of action is taken

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Expected Value of Perfect Information (EVPI)

The maximum amount an investor should be willing to pay for perfect information before making a decision in uncertain conditions

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Minimum Expected Opportunity Loss (EOL)

Worst-case scenario loss of potential profit from selecting the wrong course of action.

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Sensitivity Analysis

Evaluates how changes in input values affect the outcome of a decision in uncertain conditions.

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Payoff table

A table used to organize possible outcomes & probabilities when making decisions with several possible results.

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Alternative 1

One of three marketing strategies in the decision problem.

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Probability, p

The likelihood that a specific state of nature or economy will occur.

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State of Nature

A specific economic situation or event influencing the course of decision-making.

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Alternative 2

Another marketing strategy competing in the decision problem.

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Alternative 3

The final marketing strategy.

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Do Nothing

The action of not taking any marketing strategies.

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Best Market Strategy (Profit)

The market strategy that offers the highest potential profit across all market conditions.

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Minimax Regret Crop

The crop that minimizes the maximum potential regret, accounting for potential loss under different weather scenarios.

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Positive Study Result

Market research data indicating favorable conditions for the product launch.

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Negative Study Result

Market research data indicating unfavorable conditions for the product launch.

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Expected Monetary Value (Product Launch)

The average profit expected from launching the product, considering probabilities and potential payoffs.

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EMV - Positive Study

Expected monetary value in case the market study shows favorable product launch conditions.

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EMV - Negative Study

Expected monetary value in case the market study shows unfavorable product launch conditions.

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Market Condition Impact Decision

Profitability depends on the market condition, meaning that one strategy might perform better in one market condition vs another.

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Expected Monetary Value (EMV)

The average payoff expected from a decision under uncertainty. Calculated by multiplying each possible payoff by its probability and summing the results.

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Expected Value of Perfect Information (EVPI)

The maximum amount a decision-maker would pay for perfect information about the future.

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Minimum Expected Opportunity Loss (EOL)

The minimum expected loss associated with choosing the worst possible alternative, considering all possible events.

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Product Launch EMV

The expected monetary value of launching a product, given a specific decision on whether to conduct a study.

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Production Process Decision

Choosing the optimal production process (A, B, or C) for a manufacturing company given different demand levels and probabilities.

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Study Notes

Payoff Table Analysis

  • Payoff tables show potential outcomes and profits for different alternatives under various conditions (states of nature).
  • Alternatives represent different choices or strategies.
  • States of nature represent possible future events (e.g., market conditions).
  • Payoffs are the profits or losses associated with each alternative under each state of nature.

Decision Making Criteria

  • Optimist: An optimist chooses the alternative with the highest possible payoff under any state of nature.
  • Regret criterion: This approach calculates the regret (loss) for each alternative by finding the difference between the payoff of the best alternative and the payoff of each other alternative under each state of nature. The decision is the alternative with the lowest maximum regret.

Investment Alternatives

  • Investors consider potential market conditions (e.g., favorable, unfavorable).
  • Payoffs vary based on the market conditions and the chosen alternative.
  • Probabilities of different market scenarios are included to analyze investment risk.
  • Expected monetary value is calculated by multiplying the payoff by the probability of each state of nature.

Additional Concepts

  • Study to gain more information Investors might conduct a study to gain further information on the success of their investments.
  • Study cost: The study will cost a specific amount.
  • Probability of favorable outcome: The probability of the market being favorable given positive results from the study is presented.
  • Probability of unfavorable outcome: The probability of the market being unfavorable given negative results from the study is presented. -Study results can either be positive or negative, each carrying specific probabilities of the actual state of the market.

Additional Questions

  • Expected Monetary Value (EMV) calculation is crucial to understanding the expected value of choosing certain alternatives in different states of the market.
  • Sensitivity Analysis: This analyzes how the decision changes as the probabilities of different states of nature vary.
  • Perfect Information: This concept considers the value of perfect information on the state of nature before making a decision. If the investor had perfect knowledge, that would be the most optimal outcome and so is compared with the actual expected payoff of making a decision without such knowledge (perfect information).
  • Expected Value of Perfect Information (EVPI): measures the value of having perfect information about future events before making a decision. It represents the greatest possible improvement in a decision model, if there is perfect information available.
  • Minimum expected opportunity loss: the minimum possible monetary loss from making a decision.
  • Range of p values: This analysis looks at how the probability of specific outcomes impacts the choices.

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Related Documents

First Assignment _ Decision Analysis PDF

Description

Explore the concepts behind payoff tables and decision-making criteria in investment alternatives. This quiz covers strategies like the optimist approach and the regret criterion. Understand how different states of nature affect the outcomes of investment choices.

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