Teoria

Decision Models

1

Introduction to Decision Analysis

• The field of decision analysis provides a framework for making important decisions. • Decision analysis allows us to select a decision from a set of possible decision alternatives when uncertainties regarding the future exist. • The goal is to optimize the resulting payoff in terms of a decision criterion.

2

Introduction to Decision Analysis

• Maximizing expected profit is a common criterion when probabilities can be assessed. • Maximizing the decision maker’s utility function is the mechanism used when risk is factored into the decision making process.

3

Payoff Table Analysis

• Payoff Tables

– Payoff table analysis can be applied when:

• There is a finite set of discrete decision alternatives. • The outcome of a decision is a function of a single future event.

– In a Payoff table • The rows correspond to the possible decision alternatives. • The columns correspond to the possible future events. • Events (states of nature) are mutually exclusive and collectively exhaustive. • The table entries are the payoffs.

4

TOM BROWN INVESTMENT DECISION

• Tom Brown has inherited $1000. • He has to decide how to invest the money for one year. • A broker has suggested five potential investments.

– – – – – Gold Junk Bond Growth Stock Certificate of Deposit Stock Option Hedge

5

TOM BROWN

• The return on each investment depends on the (uncertain) market behavior during the year. • Tom would build a payoff table to help make the investment decision

6

TOM BROWN - Solution

• Construct a payoff table. • Select a decision making criterion, and apply it to the payoff table. • Identify the optimal decision. • Evaluate the solution.

S1 D1 p11 D2 p21 D3 p31 S2 p12 p22 p32 S3 p13 p23 p33 S4 p14 P24 p34

Criterion

P1 P2 P3 7

The Payoff Table

DJA is up more than1000 points DJA is up [+300,+1000] DJA moves within [-300,+300] DJA is down [-300, -800] DJA is down more than 800 points...