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qualitative analysis
Chapter 19
Decision Analysis

LEARNING OBJECTIVES

Chapter 19 describes how to use decision analysis to improve management decisions, thereby enabling you to:

1.Learn about decision making under certainty, under uncertainty, and under risk. 2.Learn several strategies for decision-making under uncertainty, including expected payoff, expected opportunity loss, maximin, maximax, and minimax regret. 3.Learn how to construct and analyze decision trees. 4.Understand aspects of utility theory.

5.Learn how to revise probabilities with sample information.

CHAPTER OUTLINE

19.1 The Decision Table and Decision Making Under Certainty Decision Table
Decision-Making Under Certainty

19.2 Decision Making Under Uncertainty
Maximax Criterion
Maximin Criterion
Hurwicz Criterion
Minimax Regret

19.3 Decision Making Under Risk
Decision Trees
Expected Monetary Value (EMV)
Expected Value of Perfect Information
Utility

19.4 Revising Probabilities in Light of Sample Information Expected Value of Sample Information

KEY TERMS

Decision AlternativesHurwicz Criterion
Decision AnalysisMaximax Criterion
Decision Making Under CertaintyMaximin Criterion
Decision Making Under RiskMinimax Regret
Decision Making Under UncertaintyOpportunity Loss Table
Decision TablePayoffs
Decision TreesPayoff Table
EMV'erRisk-Avoider
Expected Monetary Value (EMV)Risk-Taker
Expected Value of Perfect InformationStates of Nature
Expected Value of Sample InformationUtility

STUDY QUESTIONS

1.In decision analysis, decision-making scenarios are divided into three categories: decision-making under ______________, decision-making under _______________, and decision-making under ______________.

2.Many decision analysis problems can be viewed as having three variables: 1. _____________________, 2. ____________________, and 3. ______________________.

3.Occurrences of nature that can happen after a decision has been made that can affect the outcome of the decision and over which the decision-maker has little or no control are called _________________________________. The benefits or rewards that result from selecting a particular decision alternative are called _______________. The various choices or options available to the decision-maker in any given problem situation are called __________________________________.

4.Examine the decision table shown below:

State of Nature | | | 1 | 2 | 3 | 4 | |Decision | 1 |–50 | –25 | 75 |125 | |Alternative | | | | | | | | 2 | 10 | 15 | 20 | 25 | | | 3 |–20 | –5 | 10 | 20 |

The selected decision alternative using a Maximax criterion is __________________ and the optimal payoff is ___________.

5.Use the decision table from question 4. The selected decision alternative using a Maximin criterion is _____________ and the payoff for this is ____________. Suppose Hurwicz criterion is used to select a decision alternative and ( is .3. The selected decision alternative is ____________________ and the payoff is ____________________. However, if ( is .8, the selected decision alternative is ____________________ and the payoff is ____________________.

6.Use the decision table from question 4 to construct an Opportunity Loss table. Using this table and a...
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