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QMB3600 Quantitative Methods in Business Chapter 3 Decision Analysis Notes Outline Unfilled Part I (Ch3: 3.1 – 3.3, 3.7) Chapter 3: Decision Analysis Problem Formulation Decision Making without Probabilities Decision Making with Probabilities Risk Analysis and Sensitivity Analysis Decision Analysis with Sample Information Computing Branch Probabilities Decision Analysis Decision analysis can be used to develop an optimal strategy when a decision maker is faced with several __decision alternatives ___ and an uncertain or risk- filled pattern of future events. Even when a careful decision analysis has been conducted, the uncertain _future events __ make the final consequence uncertain. The risk associated with any decision alternative is a direct result of the uncertainty associated with the final consequence. A good decision analysis includes _risk analysis_ that provides _probability __ information about the favorable as well as the unfavorable consequences that may occur. Problem Formulation A decision problem is characterized by decision alternatives _, _states of nature _, and _resulting payoffs _. The decision alternatives are the _different possible strategies _ the decision maker can employ. The states of nature refer to _future events _, not under the control of the decision maker, which may occur. States of nature should be defined so that they are __mutually exclusive __ and _collectively exhaustive _.

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