ch13elementarydecisionmaking.studentsview

# ch13elementarydecisionmaking.studentsview - Chapter 13...

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Chapter 13 Elementary Decision Making We make decisions from time to time. Some decisions are big, such as which faculty to join, what job to take up, whom to marry. Some decisions are minor, such as which shirt to wear, what transport to take, which piece of pork to pick. How often do we make decisions correctly? How can we make decisions scientifically?

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As an example, here is an interesting way to decide whether one should believe in God. Example 1 : There are two events: God (with probability say, 0.2) and No God (with probability 0.8) There are two decisions: Believe or Not believe. The consequence for each decision upon the occurrence of each event is measured in terms of units of happiness gained (after death), say, as below:
Which decision should one make? Solution : We shall look at the expected reward, i.e. the average reward, for each decision: E (Believe) = (0.2 x 30) + (0.8 x 0) = 6 E (Not Believe) = 0.2x (-10) + 0.8 x 0 = -2 Since 6>-2, one must make the decision of “Believe”.

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Example 2 : A manager is considering whether he should stock one or two batches of items for sale next week. Each batch has 100 items. Each item costs him \$25. If he can sell it, the price he collects is \$45. If he cannot sell it by the end of the week, he has to scrap it. He estimates that the probability of selling 100 items is 0.4 and that of selling 200 items is 0.6. What decision should he make?
The information can be condensed into the following table: The numbers 2000, 4000 are obvious since each item sold, yields a profit of \$20. The number -500 is found as follows: of the 200 items stocked, 100 are sold at a profit of \$20 each, yielding a profit of \$2000. The other 100 are scrapped, resulting in a loss of

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## This note was uploaded on 04/22/2011 for the course STAT 301 taught by Professor Gabrille during the Spring '11 term at HKU.

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ch13elementarydecisionmaking.studentsview - Chapter 13...

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