Decision Analysis

In: Computers and Technology

Submitted By rakhi123
Words 5165
Pages 21
|Decision-Making Analysis[1] |

The Components of a Decision Problem 2
Decision Making under Uncertainty 3 Maximax Procedure 3 Maximin procedure 4 Equal Likelihood Procedure 5 Minimax Regret Procedure 5
Decision Making under Risk 6 Maximizing Expected Gain 6 Minimizing Expected Regret 7 The Expected Value of Perfect Information 8
Summary 17
Discussion Questions 18
Solved Problems 18
Problems 24
Key Terms 31

|The Components of a Decision Problem |

The three basic components of a decision problem are the decision alternatives; the possible environments, conditions, or states of nature within which a decision is to be implemented; and the outcomes or payoffs that will result from each possible combination of alternatives and states of nature.
The decision alternatives are those actions from among which the decision maker must choose. That is, they are the aspects of the decision situation over which the decision maker has direct control.
The states of nature are those aspects of the decision situation over which the decision maker does not have direct control. They certainly include things over which there is no control, such as the weather, the general state of the economy, or actions taken by the national government. They may also include things which can be influenced to some extent but not completely. The market response to a new product (which is partly determined by the price charged and advertising) or a competitor's actions (which may be at least partly determined by choices made by the decision maker) are conditions the decision maker cannot determine completely.
Making a decision and implementing it within a state of nature will result in some outcome, which may be either a gain or a loss. The payoff function specifies what that outcome is for every…...

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