C13 12ed

# C13 12ed - Decision alternatives Options available to the...

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Decision alternatives Options available to the decision maker. Chance event An uncertain future event affecting the consequence, or payoff, associated with a decision. Consequence The result obtained when a decision alternative is chosen and a chance event occurs. A measure of the consequence is often called a payoff. States of nature The possible outcomes for chance events that affect the payoff associ- ated with a decision alternative. Influence diagram A graphical device that shows the relationship among decisions, chance events, and consequences for a decision problem. Node An intersection or junction point of an influence diagram or a decision tree. Decision nodes Nodes indicating points where a decision is made. Chance nodes Nodes indicating points where an uncertain event will occur. Consequence nodes Nodes of an influence diagram indicating points where a payoff will occur. Payoff A measure of the consequence of a decision such as profit, cost, or time. Each combination of a decision alternative and a state of nature has an associated payoff (consequence).

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1 Payoff table A tabular representation of the payoffs for a decision problem. Decision tree A graphical representation of the decision problem that shows the sequen- tial nature of the decision-making process. Branch Lines showing the alternatives from decision nodes and the outcomes from chance nodes. Optimistic approach An approach to choosing a decision alternative without using prob- abilities. For a maximization problem, it leads to choosing the decision alternative corre- sponding to the largest payoff; for a minimization problem, it leads to choosing the decision alternative corresponding to the smallest payoff. Conservative approach An approach to choosing a decision alternative without using probabilities. For a maximization problem, it leads to choosing the decision alternative that maximizes the minimum payoff, for a minimization problem, it leads to choosing the deci- sion alternative that minimizes the maximum payoff. Minimax regret approach An approach to choosing a decision alternative without us- ing probabilities. For each alternative, the maximum regret is computed, which leads to choosing the decision alternative that minimizes the maximum regret. Opportunity loss, or regret The amount of loss (lower profit or higher cost) from not making the best decision for each state of nature. Expected value approach An approach to choosing a decision alternative based on the expected value of each decision alternative. The recommended decision alternative is the one that provides the best expected value. Expected value (EV) For a chance node, it is the weighted average of the payoffs. The weights are the state-of-nature probabilities. Expected value of perfect information (EVPI) The expected value of information that would tell the decision maker exactly which state of nature is going to occur (i.e., perfect information).
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