HW2_Soln

# HW2_Soln - MS&E 252 Decision Analysis I Handout#8 Homework...

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MS&E 252 Handout #8 Decision Analysis I 10/14/2007 Page 1 of 7 HW #2 Solutions Homework Assignment #2- Solutions 0 5 10 15 20 25 30 35 40 -INF-0 0-0.5 0.5-1 1-1.5 1.5-2 2-2.5 2.5-3 3-3.5 3.5-4 4-4.5 4.5-5 5-5.5 5.5-6 6-6.5 6.5-7 7-7.5 7.5-8 8-8.5 8.5-9 9-9.5 9.5-10 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 The grade distribution for this homework was fairly typical. However, very few people scored above 9/10, due to the last question about the Dow Jones Index on which very few students got more than 0.2/1. Grade Distribution by Question On the next page you will find a breakdown of how well students did on each question. For each question you will see a bar with three different marks on it: The left end of the bar (10%) corresponds to the number of points where only 10% of all students received a lower score. The right end of the bar (90%) corresponds to the number of points where only 10% of all students received a higher score. The mark in the middle of the bar (50%) corresponds to the median: the number of points such that half of the class did better than the mark and the other half did worse. That should allow you to understand the following chart. You will notice that almost everyone did very well on questions 1,3, 7, and 9. For some questions, such as questions 2 and 8, few people got the question wrong, but many of those who did lost a lot of points. This probably means that those people assigned very high probabilities on one of the wrong answers.

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MS&E 252 Handout #8 Decision Analysis I 10/14/2007 Page 2 of 7 HW #2 Solutions Score on HW Question - - - - 0.0 0.5 1.0 Question 1 10% 50% 90% Question 2 10% 50% 90% Question 3 10% 50% 90% Question 4 10% 50% 90% Question 5 10% 50% 90% Question 6 10% 50% 90% Question 7 10% 50% 90% Question 8 10% 50% 90% Question 9 10% 50% 90% Question 10 10% 50% 90%
MS&E 252 Handout #8 Decision Analysis I 10/14/2007 Page 3 of 7 HW #2 Solutions Distinctions These distinctions were prepared by the teaching team and reflect our best belief of the meanings of these terms. Decision Basis is the basis on which a decision is made. It includes three key elements: Alternatives are what you can do. You need more than one. Preferences are what you want. You must care about what might happen. Information is what you know or believe to be true. Information links what you want to what you can do. Sunk cost is a past irrevocable allocation of resources. You could also think of it as how you got into a particular situation. We only make decisions about the future, and normatively speaking, sunk costs are irrelevant to the evaluation of future decisions (ignoring taxation) and therefore should not be considered. From a descriptive perspective, decision-makers are often improperly influenced by sunk costs. E.g., “We’ve put \$10M into this venture. We can’t abandon it now!” Personal Indifferent Buying Price (PIBP) is the most you would be willing to pay in return for something that you will use and not sell. The PIBP for good G for person P is a sum of money M at which P is indifferent between {paying M and getting G} and {keeping M and not getting G}, with the important caveat that P

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