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Decision Theory: Outcomes and Consequences Not Considered

Decision Theory: Outcomes and Consequences Not Considered. Decision. Outcomes. Consequences. Decision: choose between betting on green or red chip. Objective: maximize return. Assumption: The decision to play the game has been made. .

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Decision Theory: Outcomes and Consequences Not Considered

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  1. Decision Theory: Outcomes and Consequences Not Considered Decision Outcomes Consequences Decision: choose between betting on green or red chip. Objective: maximize return. Assumption: The decision to play the game has been made. ??????? ???????? Choose to place bet ongreen. Green or Red Choose to place bet on red. ??????? ????????

  2. Decision Theory Example #1 Decision Outcomes Consequences Probability: There is an 80% chance that a green chip will be drawn and a 20% chance that a red chip will be drawn. Decision: choose between betting on green or red chip. Objective: maximize return. Assumption: The decision to play the game has been made. 80% x $1.00 = $.80 expected value Win $1.00 Green is drawn. prob. = 80% Good Decision, Good Outcome Ave. exp. value = Win $.60 Choose to place bet on Green. Redis drawn. prob. = 20% Lose $1.00 20% x ($1.00) = ($.20) expected value Good Decision, Bad Outcome Green or Red Green is drawn. prob. = 80% Lose $1.00 80% x ($1.00) = ($.80) expected value Bad Decision, Bad Outcome Choose to place bet on Red. Ave. exp. value = Lose $.60 Red is drawn. prob. = 20% Win $1.00 20% x $1.00 = $.20expected value Bad Decision, Good Outcome

  3. Decision Theory – Outcomes and Consequences Not Considered Decision Outcomes Consequences Decision: choose between investing in ????????? Objective: maximize return. Assumption: The decision to invest has been made. ????????? ?????????? Choose to invest in ?????? ????? or ????? Choose to invest in ????? ????????? ??????????

  4. Decision Theory Example #2 Decision Outcomes Consequences Probability: There is an 80% chance that the economy will improve significantly and a 20% chance that the economy will deteriorate significantly. Decision: choose between investing in stocks or investing In bonds Objective: maximize return. Assumption: The decision to invest in the Stock market or bond market has been made. 80% x 10% = 8% expected value Gain 10% Economy improves prob. = 80% Good Decision, Good Outcome Ave. exp. value = Gain 6% Choose to invest instocks. Lose 10% 20% x (10%) = (2%) expected value Economy deteriorates prob. = 20% Good Decision, Bad Outcome Stocks or Bonds? Economy improves prob. = 80% Lose 10% 80% x (10%) = (8%) expected value Bad Decision, Bad Outcome Choose to invest in bonds. Ave. exp. value = Lose 6% Economy deteriorates prob. = 20% Gain 10% 20% x 10% = 2%expected value Bad Decision, Good Outcome

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