Decision Making

DECISION MAKING

A. True / False

1. The decision maker has the option to choose the best state of nature available.

2. Decision-making under risk is issued when probability information about the states of nature is unavailable.

3. The consequence of each alternative needs to be known when using decision making under certainty.

4. Decision-making under risk requires the use of a payoff table.

5. The maximum criterion leads to a pessimistic alternative that is appropriate when the decision-making is seeking to avoid risk.

6. The equally likely criterion leads to an optimistic alternative that is appropriate when the decision-making is seeking to be exposed to risk.

7. The criterion of realism relies on a weighted average approach when choosing an alternative.

8. Minimax regret calculates the expected monetary value of each alternative thereby minimizing any regret.

9. To maximax criterion is part of decision making under uncertainty.

10. Calculate the probabilities for various states of nature are a step of Decision Theory process.

B. Questions

1. Describe what is involved in the decision process.

2. What is an alternative? What is a state of nature?

3. Discuss the differences among decision making under certainty, decision making under risk, and decision making under uncertainty.

4. Ayse Mutlu is trying to decide whether to invest in real estate, stocks, or certificates of deposit. How well she does depends on whether the economy enters a period of recession or inflation. Develop a decision table (excluding conditional values) to describe this situation.

C. Problems

1. You are planning your wedding day and need to decide this week whether the reception will be outdoors, outdoors with a tent or indoors. Your level of satisfaction will be affected by the weather on the day of reception. It will be sunny, cloudy or rainy. The table below summarizes your level of...