RMI-2302 Lecture Notes - Lecture 3: Decision Theory, Collectively Exhaustive Events, Maximum Likelihood Estimation
26 Oct 2016
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Risk in business and society - notes 3. Used to determine optimal strategies where a decision-maker is faced with several alternatives and an uncertain outcome. Identi cation of various possible outcomes (no control over outcomes) Identi cation of all the courses of action (control of actions) Determination of the pay-off function (combinations of the acts and outcomes) Choosing from among various alternatives on the basis of some criterion. Identify courses of action in the face of possible events. 1: develop pay-off and regret tables, choose a course of action in accordance with some principle. Pay-off table - represents the matrix of the conditional values associated with all the possible combinations of the acts and the events. Opportunity loss or regret - the amount of pro t foregone by not adopting the optimal course of action, or that which would give the highest pay-off for each possible event. Must not be a sequence of decisions.
