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Decision Analysis

Decision Analysis. Mary Whiteside. Decision Analysis Definitions. Actions – alternative choices for a course of action Events –possible outcomes of chance happenings Payoffs – a value associated with the result of each event Decision criteria – rule for selecting an action. Payoff Table.

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Decision Analysis

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  1. Decision Analysis Mary Whiteside

  2. Decision Analysis Definitions • Actions – alternative choices for a course of action • Events –possible outcomes of chance happenings • Payoffs – a value associated with the result of each event • Decision criteria – rule for selecting an action

  3. Payoff Table

  4. Decision Tree S $45 F Market -$36 S Don’t -$3 F -$3

  5. (Opportunity Loss)

  6. Criteria for decision making • Maximize expected monetary value • Minimize expected monetary opportunity loss • Maximize return to risk ratio • E monetary V/s • Maximize maximum monetary value (maximax) – best best case monetary value • Maximize minimum monetary value (maximin) – best worst case monetary value • Minimize maximum opportunity loss (minimax) – best worst case for opportunity loss

  7. Criteria for decision making using utility • Maximize expected utility • Minimize expected utility opportunity loss • Maximize return to risk ratio • E utility V/s

  8. Expected value of perfect information (EVPI) • EVPI = minimum expected opportunity loss • EVPI = expected profit under certainty – expected value of the best alternative

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