# Chap020 - Chapter 20 An Introduction to Decision Theory...

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Chapter 20 - An Introduction to Decision Theory Chapter 20 An Introduction to Decision Theory True / False Questions 1. Statistical decision theory is defined as the collection of techniques a decision maker can apply to choose the best alternative action. True False 2. In decision making, if there are one or more unknown factors, then the decision is made under conditions of uncertainty. True False 3. A decision maker usually has a choice among several possible alternative acts. For each alternative act, there are many possible results called events. True False 4. By definition, the decision maker has no control over the states of nature. True False 5. A state of nature is an uncertain, future event. True False 6. An expected monetary value can only be greater than or equal to zero. True False 7. An expected opportunity loss can only be greater than or equal to zero. True False 20-1

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Chapter 20 - An Introduction to Decision Theory 8. A decision maker's course of action results in a consequence or payoff. True False 9. A way to decide which common stock to purchase is to determine the profit that might be lost because the exact state of nature (the market behavior) was not known at the time the investor bought the stock. This potential loss is called opportunity loss or regret. True False 10. When the payoffs are profits, the maximin strategy selects the alternative or act with the maximum gain. True False 11. Maximizers advocate a maximin strategy. True False 12. Optimists advocate a maximin strategy. True False 13. Optimists advocate a maximax strategy. True False 14. If the expected value of stock purchases under conditions of certainty is \$1,900 and the expected value of stock purchases under conditions of uncertainty is \$1,840, then the \$60 difference is called the expected value of perfect information. True False 20-2
Chapter 20 - An Introduction to Decision Theory 15. Sensitivity analysis examines the effects that changes in the probabilities for the states of nature have on the expected values of the alternatives or acts, and the corresponding decisions. True False Fill in the Blank Questions 16. In a payoff table, what is another name for alternatives? _______ ________________________________________ 17. What is another term for a payoff or consequence? _________________ ________________________________________ 18. In decision theory, a payoff is expressed as a profit or a ______. ________________________________________ 19. To compute an expected monetary value, it requires that ______________ are estimated for each state of nature. ________________________________________ 20. What is the difference between the expected monetary value under conditions of certainty and the expected monetary value under uncertainty called? ___________ ________________________________________ 21. When all the facts are known in a decision-making situation, it can be said that the decision was made under conditions of _____________. ________________________________________ 20-3

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Chapter 20 - An Introduction to Decision Theory 22. In decision theory, an uncertain future outcome is called a: ____________________ ________________________________________ 23. What is the average return for a particular act or decision alternative called?
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