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Decision Analysis

The document describes two decision analysis problems with multiple decision alternatives and states of nature. For the first problem, it asks to construct a decision tree and determine the recommended decision using optimistic, conservative and minimax regret approaches if the state probabilities are unknown. For the second problem, it asks to determine the recommended decision using the three approaches for an unknown state probability payoff table with four alternatives and states, and also asks which approach is preferred and whether establishing the approach beforehand is important. The solutions refer to an attached Excel file for the calculations and answers.

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2K views2 pages

Decision Analysis

The document describes two decision analysis problems with multiple decision alternatives and states of nature. For the first problem, it asks to construct a decision tree and determine the recommended decision using optimistic, conservative and minimax regret approaches if the state probabilities are unknown. For the second problem, it asks to determine the recommended decision using the three approaches for an unknown state probability payoff table with four alternatives and states, and also asks which approach is preferred and whether establishing the approach beforehand is important. The solutions refer to an attached Excel file for the calculations and answers.

Uploaded by

cutefeet
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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Problem 1: The following payoff table shows profit for a decision analysis problem with two decision alternatives

and three states of nature: State of Nature Decision Alternative D1 D2 250 100 S1 100 100 S2 25 75 S3

A. Construct a decision tree for this problem. B. If the decision maker knows nothing about the probabilities of the three states of nature, what is the recommended decision using the optimistic, conservative and minimax regret approaches?

250 Solution: A. D1 100 25 D2 100 100 75

B. [Please refer to the attachment Decision Analysis.xlsx, Solution-1 for


detailed calculations and answers]

2. Suppose that a decision maker faced with four decision alternatives and four states of nature develops the following profit payoff table: State of Nature Decision Alternative D1 D2 D3 D4 S1 14 11 8 S2 9 10 9 10 S3 10 8 10 11 S4 5 7 10 13

11

A. If the decision maker knows nothing about the probabilities of the four states of nature, what is recommended decision using the optimistic, conservative and minimax regret approaches? B. Which approach do you prefer? Explain. Is establishing the most appropriate approach before analyzing the problem important for the decision maker? Explain. C. Assume that the payoff table provides cost rather than profit payoffs. What is the recommended decision using the optimistic, conservative and minimax regret approaches? Solution:

A. [Please refer to the attachment Decision Analysis.xlsx, Solution-2-A


for detailed calculations and answers]

B. The Minimax Regret decision is preferable. It tends to reduce the risk


involved in decision making. Establishing the most appropriate approach before analyzing the problem is very important for the decision maker. The decision maker can choose the correct decision alternative according to his requirements and risk appetite.

C. [Please refer to the attachment Decision Analysis.xlsx, Solution-2-C


for detailed calculations and answers]

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