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QUANTI FINALS - Glossary Decision Tree Alternative A course...

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Glossary – Decision Tree Alternative A course of action or a strategy that may be chosen by a decision maker. Coefficient of Realism ( _ ) A number from 0 to 1. When the coefficient is close to 1, the decision criterion is optimistic. When the coefficient is close to zero, the decision criterion is pessimistic. Conditional Probability A posterior probability. Conditional Value or Payoff A consequence, normally expressed in a monetary value, that occurs as a result of a particular alternative and state of nature. Criterion of Realism A decision-making criterion that uses a weighted average of the best and worst possible payoffs for each alternative. Decision Making under Certainty A decision-making environment in which the future outcomes or states of nature are known. Decision Making under Risk A decision-making environment in which several outcomes or states of nature may occur as a result of a decision or alternative. The probabilities of the outcomes or states of nature are known. Therefore, alternative 1 is the best strategy using utility as the decision criterion. If EMV had been used, alternative 2 would have been the best strategy. The utility curve is a risk-seeker utility curve, and the choice of playing the game certainly reflects this preference for risk. 96 CHAPTER 3 • DECISION ANALYSIS Decision Making under Uncertainty A decision-making environment in which several outcomes or states of nature may occur. The probabilities of these outcomes, however, are not known. Decision Node (Point) In a decision tree, this is a point where the best of the available alternatives is chosen. The branches represent the alternatives. Decision Table A payoff table. Decision Theory An analytic and systematic approach to decision making. Decision Tree A graphical representation of a decision making situation. Efficiency of Sample Information A measure of how good the sample information is relative to perfect information. Equally Likely. A decision criterion that places an equal weight on all states of nature. Expected Monetary Value (EMV) The average value of a decision if it can be repeated many times. This is determined by multiplying the monetary values by their respective probabilities. The results are then added to arrive at the EMV. Expected Value of Perfect Information (EVPI) The average or expected value of information if it were completely accurate. The increase in EMV that results from having perfect information. Expected Value of Sample Information (EVSI) The increase in EMV that results from having sample or imperfect information. Expected Value with Perfect Information (EVwPI) The
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average or expected value of a decision if perfect knowledge of the future is available. Hurwicz Criterion The criterion of realism.
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