Deck 3: Decision Analysis

Question 1

The decision theory processes of maximizing expected monetary value (EMV) and minimizing expected opportunity loss (EOL) should lead us to choose the same alternatives.

Answer 1

True

Question 2

The nodes on decision trees represent either decisions or states of nature.

Answer 2

True

Question 3

To determine the effect of input changes on decision results, we should perform a sensitivity analysis.

Answer 3

True

Question 4

The maximin decision criterion is used by pessimistic decision makers and minimizes the maximum outcome for every alternative.

Question 5

The EMV approach and Utility theory always result in the same choice of alternatives.

Question 6

Any problem that can be represented in a decision tree can be easily portrayed in a decision table.

Question 7

A decision table is sometimes called a payout table.

Question 8

Any problem that can be presented in a decision table can also be graphically portrayed in a decision tree.

Question 9

The decision maker can control states of nature.

Question 10

The several criteria (maximax, maximin, equally likely, criterion of realism, minimax regret) used for decision making under uncertainty may lead to the choice of different alternatives.

Question 11

EVPI (expected value of perfect information) is a measure of the maximum EMV as a result of additional information.

Question 12

All decisions that result in a favorable outcome are considered to be good decisions.

Question 13

Expected monetary value (EMV) is the payoff you should expect to occur when you choose a particular alternative.

Question 14

Utility theory may help the decision maker include the impact of qualitative factors that are difficult to include in the EMV model.

Question 15

In a decision table, all of the alternatives are listed down the left side of the table, while all of the possible outcomes or states of nature are listed across the top.

Question 16

Expected monetary value (EMV) is the average or expected monetary outcome of a decision if it can be repeated a large number of times.

Question 17

Optimistic decision makers tend to discount favorable outcomes.

Question 18

When using the EOL as a decision criterion, the best decision is the alternative with the largest EOL value.

Question 19

The maximax decision criterion is used by pessimistic decision makers and maximizes the maximum outcome for every alternative.

Question 20

The difference in decision making under risk and decision making under uncertainty is that under risk, we think we know the probabilities of the states of nature, while under uncertainty we do not know the probabilities of the states of nature.

Question 21

The following figure illustrates a utility curve for someone who is a risk seeker.

Question 22

The criterion of realism is also called the Laplace criterion.

Question 23

A utility curve that shows utility increasing at an increasing rate as the monetary value increases represents the utility curve of a risk seeker.

Question 24

The following is a payoff table giving profits for various situations. What decision would an optimist make?

A) Alternative 1
B) Alternative 2
C) Alternative 3
D) Do Nothing
E) State of Nature A

Question 25

In a decision problem where we wish to use Bayes' theorem to calculate posterior probabilities, we should always begin our analysis with the assumption that all states of nature are equally likely, and use the sample information to revise these probabilities to more realistic values.

Question 26

The following is a payoff table giving profits for various situations. What decision would a pessimist make?

A) Alternative 1
B) Alternative 2
C) Alternative 3
D) Do Nothing
E) State of Nature A

Question 27

Expected monetary value (EMV) is

A) the average or expected monetary outcome of a decision if it can be repeated a large number of times.
B) the average or expected value of the decision, if you know what would happen ahead of time.
C) the average or expected value of information if it were completely accurate.
D) the amount you would lose by not picking the best alternative.
E) a decision criterion that places an equal weight on all states of nature.

Question 28

The assignment of a utility value of 1 to an alternative implies that alternative is preferred to all others.

Question 29

A second table (an opportunity loss table) must be computed when applying the maximin decision criterion.

Question 30

What makes the difference between good decisions and bad decisions?

A) A good decision is based on logic.
B) A good decision considers all available data.
C) A good decision considers all alternatives.
D) A good decision applies quantitative approaches.
E) All the above

Question 31

A utility curve that shows utility increasing at a decreasing rate as the monetary value increases represents the utility curve of a risk seeker.

Question 32

Which of the following is not a characteristic of a good decision?

A) based on logic
B) considers all available data
C) considers all possible alternatives
D) employs appropriate quantitative techniques
E) always results in a favorable outcome

Question 33

The equally likely decision criterion is also called the Laplace criterion.

Question 34

By studying a person's Utility Curve, one can determine whether the individual is a risk seeker, risk avoider, or is indifferent to risk.

Question 35

Utility theory provides a decision criterion that is superior to the EMV or EOL in that it may allow the decision maker to incorporate her own attitudes toward risk.

Question 36

Utility values typically range from -1 to +1.

Question 37

Which of the following is not considered a criteria for decision making under uncertainty?

A) optimistic
B) pessimistic
C) equally likely
D) random selection
E) minimax regret

Question 38

A pessimistic decision making criterion is

A) maximax.
B) equally likely.
C) maximin.
D) decision making under certainty.
E) minimax regret.

Question 39

An analytic and systematic approach to the study of decision making is referred to as

A) decision making under risk.
B) decision making under uncertainty.
C) decision theory.
D) decision analysis.
E) decision making under certainty.

Question 40

Which of the following is true about the expected value of perfect information?

A) It is the amount you would pay for any sample study.
B) It is calculated as EMV minus EOL.
C) It is calculated as expected value with perfect information minus maximum EMV.
D) It is the amount charged for marketing research.
E) None of the above

Question 41

Consider the following payoff table. Based upon these probabilities, a person would select Alternative 2. Suppose there is concern about the accuracy of these probabilities. It can be stated that Alternative 2 will remain the best alternative as long as the probability of A is at least

A) 0.33.
B) 0.50.
C) 0.40.
D) 0.60.
E) None of the above

Question 42

Nick has plans to open some pizza restaurants, but he is not sure how many to open. He has prepared a payoff table to help analyze the situation. Nick believes there is a 40 percent chance that the market will be good, a 30 percent chance that it will be fair, and a 30 percent chance that it will be poor. A market research firm will analyze market conditions and will provide a perfect forecast (they provide a money back guarantee). What is the most that should be paid for this forecast?

A) $ 44,000
B) $ 53,000
C) $123,000
D) $176,000
E) $132,000

Question 43

The following is a payoff table giving profits for various situations. The probabilities for states of nature A, B, and C are 0.3, 0.5, and 0.2, respectively. If a perfect forecast of the future were available, what is the expected value with this perfect information?

A) 130
B) 160
C) 166
D) 36
E) None of the above

Question 44

Optimistic decision makers tend to ________.

A) magnify favorable outcomes
B) ignore bad outcomes
C) discount favorable outcomes
D) A and B
E) B and C

Question 45

In decision theory, we call the payoffs resulting from each possible combination of alternatives and outcomes ________.

A) marginal values
B) conditional values
C) conditional probabilities
D) Bayesian values
E) joint values

Question 46

How are decision tables organized?

A) alternatives down the left, states of nature on top, payoffs inside
B) states of nature down the left, alternatives on top, payoffs inside
C) alternatives down the left, payoffs on top, states of nature inside
D) payoffs down the left, alternatives on top, states of nature inside
E) states of nature down the left, payoffs on top, alternatives inside

Question 47

Dr. Mac, a surgeon, must decide what mode of treatment to use on Mr. Samuels. There are three modes of treatment: Mode A, B, and C; and three possible states of nature: 1.Treatment succeeds and patient leads a normal life, 2. Patient survives treatment but is permanently disabled, and 3. Patient fails to survive treatment. Dr. Mac has prepared the decision table below. What mode of treatment maximizes the expected value?

A) Mode A
B) Mode B
C) Mode C
D) All three treatments are equally desirable.
E) Normal Life

Question 48

The following is a payoff table. What decision should be made based on the minimax regret criterion?

A) Alternative 1
B) Alternative 2
C) Alternative 3
D) State of Nature C
E) Does not matter

Question 49

The following is a payoff table. What decision should be made based on the minimax regret criterion?

A) Alternative 1
B) Alternative 2
C) Alternative 3
D) State of Nature C
E) Does not matter

Question 50

Consider the following payoff table. How much should be paid for a perfect forecast of the state of nature?

A) 170
B) 30
C) 10
D) 100
E) 40

Question 51

Pessimistic decision makers tend to ________.

A) magnify favorable outcomes
B) ignore bad outcomes
C) discount favorable outcomes
D) A and B
E) B and C

Question 52

The following is an opportunity-loss table. The probabilities for the states of nature A, B, and C are 0.3, 0.5, and 0.2, respectively. If a person were to use the expected opportunity loss criterion, what decision would be made?

A) Alternative 1
B) Alternative 2
C) Alternative 3
D) State of Nature C
E) State of Nature B

Question 53

The following is an opportunity loss table. What decision should be made based on the minimax regret criterion?

A) Alternative 1
B) Alternative 2
C) Alternative 3
D) State of Nature A
E) Does not matter

Question 54

Another name for a decision table is a ________.

A) payment table
B) payout table
C) payoff table
D) pay-up table
E) decision tree

Question 55

Which of the following is the fourth step of the "Six Steps in Decision Making"?

A) Select one of the mathematical decision theory models.
B) List the possible alternatives.
C) Apply the model and make your decision.
D) List the payoff or profit of each combination of alternatives and outcomes.
E) Identify the possible outcomes or states of nature.

Question 56

The following is an opportunity loss table. What decision should be made based on the minimax regret criterion?

A) Alternative 1
B) Alternative 2
C) Alternative 3
D) State of Nature C
E) Does not matter

Question 57

Which of the following is not one of the steps considered in the "Six Steps in Decision Making"?

A) Clearly define the problem at hand
B) List the possible alternatives.
C) Apply the model and make your decision.
D) List the payoff or profit of each combination of alternatives and outcomes.
E) Evaluate the success of the decision.

Question 58

Nick has plans to open some pizza restaurants, but he is not sure how many to open. He has prepared a payoff table to help analyze the situation. As Nick does not know how his product will be received, he assumes that all three states of nature are equally likely to occur. If he uses the equally likely criterion, what decision would he make?

A) Open 1
B) Open 2
C) Good market
D) Fair market
E) Do nothing

Question 59

The following is a payoff table giving profits for various situations. The probabilities for states of nature A, B, and C are 0.3, 0.5, and 0.2, respectively. If a person selected Alternative 1, what would the expected profit be?

A) 120
B) 133.33
C) 126
D) 180
E) None of the above

Question 60

The following is a payoff table giving profits for various situations. The probabilities for states of nature A, B, and C are 0.3, 0.5, and 0.2, respectively. If a perfect forecast of the future were available, what is the expected value of perfect information (EVPI)?

A) 166
B) 0
C) 36
D) 40
E) None of the above

Question 61

The equally likely criterion is also called the ________ criterion.

A) Hurwicz
B) uncertainty
C) Laplace
D) LaFlore
E) Huchenmeizer

Question 62

The Hurwicz criterion is also called the criterion of ________.

A) regret
B) equality
C) optimism
D) realism
E) pessimism

Question 63

The three decision-making environments are decision making under ________.

A) utility, risk, and certainty
B) utility, risk, and uncertainty
C) utility, certainty, and uncertainty
D) utility, equity, and certainty
E) risk, certainty, and uncertainty

Question 64

In decision making under ________, there are several possible outcomes for each alternative, and the decision maker does not know the probabilities of the various outcomes.

A) risk
B) utility
C) certainty
D) probability
E) uncertainty

Question 65

A utility curve showing utility increasing at an increasing rate as the monetary value increases represents

A) a risk avoider.
B) utility assessment.
C) a risk seeker.
D) conditional values.
E) expected utilities.

Question 66

The Hurwicz criterion coefficient of realism measures the decision maker's degree of ________.

A) utility
B) pessimism
C) certainty
D) optimism
E) regret

Question 67

A market research survey is available for $10,000. Using a decision tree analysis, it is found that the expected monetary value with no survey is $62,000. If the expected value of sample information is -$7,000, what is the expected monetary value with the survey?

A) $45,000
B) $62,000
C) -$17,000
D) $55,000
E) None of the above

Question 68

A risk avoider is a person for whom the utility of an outcome

A) decreases as the monetary value increases.
B) stays the same as monetary value increases.
C) increases at an increasing rate as the monetary value increases.
D) increases at a decreasing rate as monetary value increases.
E) None of the above

Question 69

In the construction of decision trees, which of the following shapes represents a state of nature node?

A) square
B) circle
C) diamond
D) triangle
E) None of the above

Question 70

The optimistic decision criterion is the criterion of ________.

A) maximax
B) maximin
C) realism
D) equally likely
E) minimax regret

Question 71

In decision making under ________, there are several possible outcomes for each alternative, and the decision maker knows the probability of occurrence of each outcome.

A) risk
B) utility
C) certainty
D) probability
E) uncertainty

Question 72

Utilization of Bayes' theorem requires the use of all but

A) prior probabilities.
B) marginal probabilities.
C) conditional probabilities.
D) posterior probabilities.
E) expected monetary values (EMV).

Question 73

The expected value of sample information (EVSI) can be used to

A) establish a maximum amount to spend on additional information.
B) calculate conditional probabilities.
C) establish risk avoidance.
D) provide points on a utility curve.
E) None of the above

Question 74

In Bayesian analysis, conditional probabilities are also known as which of the following?

A) anterior probabilities
B) posterior probabilities
C) prior probabilities
D) marginal probabilities
E) joint probabilities

Question 75

Decision trees are particularly useful when

A) perfect information is available.
B) formulating a conditional values table.
C) the opportunity loss table is available.
D) a sequence of decisions must be made.
E) all possible outcomes and alternatives are not known.

Question 76

A market research survey is available for $10,000. Using a decision tree analysis, it is found that the expected monetary value with the survey is $75,000. The expected monetary value with no survey is $62,000. What is the expected value of sample information?

A) -$7,000
B) $3,000
C) $7,000
D) $13,000
E) None of the above

Question 77

A company is considering producing a new children's bar soap. A market research firm has told the company that if they perform a survey, a positive survey of a favorable market occurs 65 percent of the time. That is, P(positive survey ∣ favorable market) = 0.65. Similarly, 40 percent of the time the survey falsely predicts a favorable market; thus, P(positive survey ∣ unfavorable market) = 0.40. These statistics indicate the accuracy of the survey. Prior to contacting the market research firm, the company's best estimate of a favorable market was 50 percent. So, P(favorable market) = 0.50 and P(unfavorable market) = 0.50. Using Bayes' theorem, determine the probability of a favorable market given a favorable survey.

A) 0.62
B) 0.38
C) 0.53
D) 0.65
E) None of the above

Question 78

In the construction of decision trees, which of the following shapes represents a decision node?

A) square
B) circle
C) diamond
D) triangle
E) None of the above

Question 79

What is the range of the Hurwicz criterion coefficient of realism α?

A) 1 to 100
B) 1 to 10
C) 0 to 10
D) 0 to 1
E) −1 to 1

Question 80

Bayes' theorem enables decision makers to revise probabilities based on

A) perfect information.
B) knowing, ahead of time, the actual outcome of the decision.
C) additional information.
D) measurements of utility.
E) None of the above