DecisionAnalysis-1

DecisionAnalysis-1 - Judgments and Decisions Psych 253 • Decision Analysis(usually “risky” or uncertain decisions • Examples Symbols in

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Unformatted text preview: Judgments and Decisions Psych 253 • Decision Analysis (usually “risky” or uncertain decisions) • Examples Symbols in Decision Analysis Decision Node – under control of decision maker Chance Node – NOT under control of decision maker Weather Forecasting Decision Safe Conditions, probably Damage Dangerous Conditions, probably Damage Safe Conditions, No Damage Stay Evacuate Hurricane Misses Hurricane Hits Political Decision Stay at the Law Practice Lose Election Win Election Run Don’t Run Organizational R estructuring Decision Maintain the Current Organizational Hierarchy Key People Quitting, Lost Time Lost Revenues Increased Profits Happier, More Motivated Employees Restructure Don’t Restructure What is similar about these decisions? How do you decide what to do? U(Sure thing) U(Risky option) = p(B)* U(B) + (1 - p(B)) * U(W) Can set U(B) = 100 and U(W) = 0 Determine U(Sure thing) Set the utilities of the options equal to each other and solve for p(B) U(Sure Thing) = U(Risky Option) U(Sure Thing) = p(B)*U(B) + (1-p(B))*U(W) U(Sure Thing) = p(B)*100 + (1-p(B))*0 Suppose U(Sure Thing) = 35 35 = p(B)*100 + (1- p(B))*0 Solve for p(B) P(B) = 35/100 = 35% Sometimes more than one variable is unknown. Solutions depend on combinations of variables. James’s car was severely damaged by an uninsured motorist. James had no collision insurance. He was facing the loss of his car (valued at $4000). James considered suing the driver. If he did sue, how much should he be willing to pay a lawyer to help him? He constructed the following decision tree. Don’t Sue Sue Win Lose $0-Fee $4,000 - Fee EV(Sue) = p(W)*($4000 - Fee) + (1 – p(Win))*(-Fee) EV(Don’t Sue) = $0 Set EV(Sue) = EV(Don’t Sue)...
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This note was uploaded on 01/17/2012 for the course PPE 253 taught by Professor Mellers during the Fall '11 term at UPenn.

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DecisionAnalysis-1 - Judgments and Decisions Psych 253 • Decision Analysis(usually “risky” or uncertain decisions • Examples Symbols in

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