BUS 336 Lecture Notes - Lecture 5: Emv, Utility, Decision Table

• School: Simon Fraser University
• Department: Business Administration
• Course: BUS 336
• Professor: Andrew Flostrand

Document Summary

Measures emv as a function of probability of the "best" state of nature result, then identifies the probability values (p) where the optimal decision would change. Let p = probability of a favorable market, and express each emv as a linear function of p. Each choice has a line that is the value in dollars of the probability of success and the choice with the highest monetary value is the optimal choice. E. g. at the point where emv (do nothing) = emv (small plant), equate the two functions to solve for p. Decision trees: any problem that can be represented in a decision table can be graphically represented in a tree. Most beneficial when a sequence of decisions must be made. All decision trees contain decision points/nodes and state of nature points/nodes. At decision nodes one of several alternatives may be chosen. At state of nature nodes one state of nature will occur.