Question 1

Expected monetary value gives the long-run average payoff if a large number of identical decisions could be made.

Accepted Answer

Expected monetary value is defined as the long-run average payoff if a large number of identical decisions could be made, taking into account the probabilities of different outcomes. Therefore, the statement is true.

Question 2

The EVPI indicates an upper limit on the amount a decision-maker should be willing to spend to obtain perfect information.

Accepted Answer

This is true. The EVPI (Expected Value of Perfect Information) represents the maximum amount a decision-maker should be willing to pay for perfect information, as it measures the value of the additional insight to the decision-making process.

Question 3

The expected monetary value approach is most appropriate when the decision-maker is risk-neutral.

Accepted Answer

The expected monetary value approach assumes that the decision-maker is risk-neutral, meaning they are indifferent to risk and only make decisions based on the expected value of each option.

Question 4

Expected monetary value gives the actual payoff one can expect in a given situation involving risk.

Accepted Answer

Expected monetary value (EMV) is a statistical concept that represents the average outcome of a set of uncertain events, not the actual payoff one can expect in any single situation. It is a theoretical calculation used for decision-making under uncertainty, rather than a guarantee of specific results.

Question 5

Graphical sensitivity analysis is used when the payoffs and probabilities of decision alternatives are uncertain.

Accepted Answer

Graphical sensitivity analysis is a technique used to evaluate decision alternatives with uncertain payoffs and probabilities. It involves creating a graph to show the impact on the decision outcome of changing the probabilities or payoffs of the alternative options.

Question 6

In an influence diagram,the circles show chance events.

Accepted Answer

In an influence diagram, the circles represent chance events or uncertain factors.

Question 7

A structured approach to decision making is important because the intuitive quick approach does not consider all the relevant information and possible alternatives,and can be biased.

Accepted Answer

A structured approach to decision making helps to ensure that all relevant information and alternatives are considered and evaluated in a systematic way, leading to more informed and objective decisions. In contrast, relying solely on intuition and quick judgments can lead to overlooking important factors and being influenced by biases and personal preferences.

Question 8

Graphical sensitivity analysis is limited to cases with no more than two alternatives.

Accepted Answer

Graphical sensitivity analysis can be used for cases with more than two alternatives, but it becomes more complex and difficult to visualize.

Question 9

An advantage of decision trees compared to payoff tables is that they permit us to analyze situations involving sequential or multistage decisions.

Accepted Answer

Decision trees allow for the analysis of sequential or multistage decisions, while payoff tables only analyze single-stage decisions.

Question 10

A utility is a quantification of a person's value for various payoffs.

Accepted Answer

A utility is a measure of the satisfaction or usefulness that a person derives from a particular outcome or decision. It is a way of quantifying a person's subjective preferences for different payoffs.

Question 11

The probabilities assigned to each state of nature are taken from the appropriate probability distribution tables.

Accepted Answer

The answer of The probabilities assigned to each state of...

Question 12

Typically the choice to "do nothing" based on a preference to stick with the status quo is not considered in the list of possible alternatives for a decision.

Accepted Answer

Typically, the choice of "doing nothing" or maintaining the status quo is included as one of the possible alternatives for a decision.

Question 13

In order to use the expected value approach,one needs to determine the probabilities of future payoffs.

Accepted Answer

The expected value approach relies on determining the probabilities of future payoffs in order to calculate the expected value of an investment or decision.

Question 14

Influence diagrams represent complex situations with many random variables,but only one decision variable.

Accepted Answer

Influence diagrams can have multiple decision variables in addition to many random variables.

Question 15

The expected value approach is used for major,non-recurring decisions involving several decision variables.

Accepted Answer

The expected value approach is often used for decisions under uncertainty and involves calculating the weighted average of all possible outcomes, but it is not specifically tied to major, non-recurring decisions or those involving several decision variables. It can be applied to a wide range of decision-making scenarios, including recurring decisions and those involving a single decision variable.

Question 16

In a decision tree,square nodes represent chance events,and circular nodes denote decision points.

Accepted Answer

In a decision tree, circular nodes represent chance events, and square nodes denote decision points.

Question 17

Decision trees are analyzed from left to right.

Accepted Answer

Decision trees are typically analyzed from the top (root) down to the leaves, not from left to right.

Question 18

In decision theory,states of nature refer to a set of possible values for a random variable.

Accepted Answer

States of nature refer to the possible values that a random variable can take, making the statement true.

Question 19

Decision trees are useful when there is more than one decision variable.

Accepted Answer

Decision trees are particularly useful when there are multiple decision variables to consider, as they help to systematically evaluate different options and potential outcomes based on various factors.

Question 20

Influence diagrams contain more detailed information than decision trees.

Accepted Answer

Influence diagrams provide a high-level summary of the decision-making problem, focusing on the relationships between decisions, uncertainties, and objectives, whereas decision trees offer a more detailed, step-by-step breakdown of the decisions and possible outcomes.

Quiz 7: Decision Analysis