Chapter 3 Decision Analysis

1) Expected monetary value (EMV) is the
average or expected monetary outcome of a decision if it can be repeated a
large number of times.

2) Expected monetary value (EMV) is the
payoff you should expect to occur when you choose a particular alternative.

3) The decision maker can control states
of nature.

4) All decisions that result in a
favorable outcome are considered to be good decisions.

5) The difference in decision making under
risk and decision making under uncertainty is that under risk, we think we know
the probabilities of the states of nature, while under uncertainty we do not
know the probabilities of the states of nature.

6) EVPI (expected value of perfect
information) is a measure of the maximum EMV as a result of additional
information.

7) When using the EOL as a decision
criterion, the best decision is the alternative with the largest EOL value.

8) To determine the effect of input
changes on decision results, we should perform a sensitivity analysis.

9) The maximax decision criterion is used
by pessimistic decision makers and maximizes the maximum outcome for every
alternative.

10) The maximin decision criterion is used
by pessimistic decision makers and minimizes the maximum outcome for every
alternative.
11) Optimistic decision makers tend to
discount favorable outcomes.
12) The decision theory processes of
maximizing expected monetary value (EMV) and minimizing expected opportunity
loss (EOL) should lead us to choose the same alternatives.
13) The several criteria (maximax,
maximin, equally likely, criterion of realism, minimax regret) used for
decision making under uncertainty may lead to the choice of different
alternatives.

14) A decision table is sometimes called a
payout table.

15) It is possible for an alternative to
be the best among all decision criteria.

16) Any problem that can be presented in a
decision table can also be graphically portrayed in a decision tree.

17) Any problem that can be represented in
a decision tree can be easily portrayed in a decision table.

18) The decision making criterion of
realism only applies to maximizing expected payoff.
19) In a decision table, all of the
alternatives are listed down the left side of the table, while all of the
possible outcomes or states of nature are listed across the top.
20) The EMV approach and Utility theory
always result in the same choice of alternatives.

21) Utility theory may help the decision
maker include the impact of qualitative factors that are difficult to include
in the EMV model.

22) In a decision problem where we wish to
use Bayes’ theorem to calculate posterior probabilities, we should always begin
our analysis with the assumption that all states of nature are equally likely,
and use the sample information to revise these probabilities to more realistic
values.

23) A utility curve that shows utility
increasing at an increasing rate as the monetary value increases represents the
utility curve of a risk seeker.
24) A utility curve that shows utility
increasing at a decreasing rate as the monetary value increases represents the
utility curve of a risk seeker.
25) The criterion of realism is also
called the Laplace criterion.

26) Utility values typically range from -1
to +1.
27) By studying a person’s Utility Curve,
one can determine whether the individual is a risk seeker, risk avoider, or is
indifferent to risk.

28) The equally likely decision criterion
is also called the Laplace criterion.
UNCERTAINTY

29) Utility theory provides a decision
criterion that is superior to the EMV or EOL in that it may allow the decision
maker to incorporate her own attitudes toward risk.
30) The assignment of a utility value of 1
to an alternative implies that alternative is preferred to all others.