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Discussion Questions 3-I Give an example of a good decision that you made that resulted in a bad outcome. Also give an example of a bad decision that you made that had a good out-come. Why was each decision good or bad? 3-2 Describe what is involved in the decision process. 3-3 What is an alternative? What is a state of nature? 3-4 Discuss the differences among decision making un-der certainty, decision making under risk, and deci-sion making under uncertainty. 3-5 What techniques are used to solve decision-making problems under uncertainty? Which technique re-sults in an optimistic decision? Which technique re-sults in a pessimistic decision? 3-6 Define opportunity loss. What decision-making cri-teria are used with an opportunity loss table? 3-7 What information should be placed on a decision tree? 3-8 Describe how you would determine the best decision using the EMV criterion with a decision tree. 3.9 What is the difference between prior and posterior probabilities? 3-10 What is the purpose of Bayesian analysis? Describe how you would use Bayesian analysis in the decision-making process. 3-11 What is the EVS1? How is this computed? 3-12 How is the efficiency of sample information computed? 3.13 What is the overall purpose of utility theory?
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3-14 Briefly discuss how a utility function can be as-sessed. What is a standard gamble. and how is it used in determining utility values? 3.15 How is a utility curve used in selecting the best deci-sion for a particular problem? 3-16 What is a risk seeker? What is a risk avoider? How does the utility curve for these types of decision makers differ?
Problems W.3-17 Kenneth Brown is the principal owner of Brown Oil, Inc. After quitting his university teaching job, Ken has been able to increase his annual salary by a fac-tor of over 100. At the present time, Ken is forced to consider purchasing some more equipment for Brown Oil because of competition. His alternatives are shown in the following table:
EQUIPMENT
FAVORABLE MARKET (S)
UNFAVORABLE MARKET (S)
Sub 100 Oiler .1 Texan
300,000 250,000 75,000
—200,000 —100.000 —18,000
For example. if Ken purchases a Sub 100 and if there is a favorable market, he will realize a profit of $300,000. On the other hand, if the market is
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