BU275 Lecture Notes - Lecture 2: Decision Analysis, Expected Value Of Perfect Information, Perfect Information
Document Summary
Decision alternatives: different possible strategies decision maker can employ. States of nature: an actual event that may occur in the future (good economic conditions, bad economic conditions) determines outcome of decision; are mutually exclusive. Payoff tables: organizing a decision situation, including the payoffs from different decisions given the various states of nature. Payoffs typically expressed in terms of profit revenues or cost. Decision criteria: maximax, maximin, manimax regret, hurwicz, equal likelihood. Maximax criterion: results in the maximum of the maximum payoffs. Decision maker assumes that the most favourable state of nature for each decision alternative will occur. Select the maximum payoff for each decision. Decision maker who uses maximax criterion assumes a very optimistic future with respect to the state of nature. Maximin criterion: results in the maximum of the minimum payoff. Of the minimum payoffs, the maximum is selected. Regret: difference between the payoff from the best decision and all other decision payoffs.
