Deck 19: Introduction to Decision Analysis

Question 1

A disadvantage of the maximax and maximin criteria is that they use only one value from the payoff table to make a decision.

Answer 1

True

Question 2

Nonprobabilistic criteria are used when either the probabilities associated with the possible payoffs are unknown or the decision maker lacks confidence and/or information with which to assess probabilities for the various payoffs.

Answer 2

True

Question 3

An optimistic decision criterion for dealing with uncertainty without using probability is the maximax criterion.

Answer 3

True

Question 4

In business, you will encounter a wide variety of decision situations. The two primary decision environments are certainty and uncertainty.

Question 5

In reality, the typical business decision-making environment is one of certainty rather than uncertainty.

Question 6

The possible outcomes in a decision situation over which the decision maker has no control is referred to as the choices.

Question 7

The established basis for making a decision gives us the criteria for analyzing a decision and making a "best" choice.

Question 8

In a certainty environment, the best decision is not necessarily associated with the best outcome.

Question 9

Some decision criteria take into account the probabilities associated with each outcome. One of the options, the expected-value criterion, refers to the long-run average outcome for a given alternative.

Question 10

Not all decisions require the use of decision analysis.

Question 11

By "best decision," we mean the alternative course of action, using all available information that best satisfies the decision criterion.

Question 12

A loss of convenience is the difference between the actual payoff that occurs for a decision and the optimal payoff for the same state of nature.

Question 13

All three decision criteria (maximax, maximin, minimax regret) lead to the same decisions, describing a specific decision-making philosophy.

Question 14

The outcome that is associated with any combination of a particular state of nature and an alternative is called a payoff.

Question 15

A conservative decision criterion for dealing with uncertainty without using probability is referred to as the maximin criterion.

Question 16

Certainty represents a situation where the results of selecting each alternative are known before the decision is made.

Question 17

Probabilistic criteria incorporates the decision maker's probability of each state of nature occurring.

Question 18

Uncertainty is a decision environment in which the decision maker does not know what outcome will occur when an alternative is selected.

Question 19

A decision criterion that considers the results of selecting the "wrong" alternative is referred to as the maximax regret criterion.

Question 20

The payoffs associated with all possible combinations of alternatives and states of nature constitute a profit or loss table.

Question 21

A decision tree is a diagram that illustrates the correct ordering of actions and events in a decision analysis problem. Each act or event is represented by a branch on the decision tree.

Question 22

Which one of the factors below would not affect the complexity of a decision?

A) The number of alternatives available to the decision maker.
B) The number of possible outcomes associated with each alternative.
C) The general level of uncertainty associated with the decision.
D) The probability of having a positive outcome.

Question 23

Sensitivity analysis measures how sensitive a decision is to the number of possible outcomes.

Question 24

A cash flow is defined as usually any dollar change (positive or negative) in the decision maker's asset position.

Question 25

Explain the goal of decision analysis and identify three factors that affect the complexity of a decision.

Question 26

Explain the difference between the two main categories of decision criteria.

Question 27

Select the best answer. A decision maker must identify the outcomes for each decision alternative and

A) keeps the choices organized by constructing a table.
B) determine the biggest money making alternative.
C) assess probabilities associated with each outcome.
D) all of the above.

Question 28

Jamie Anderson is analyzing the following payoff table. She is trying to choose how many salads to make in advance each day before she knows the actual demand.

Question 29

Decision makers must continually remind themselves that

A) there is a difference between a good decision and a good outcome.
B) not all decisions require the use of decision analysis.
C) the complexity of the decision situation usually determines the usefulness of decision analysis.
D) All of the above.

Question 30

Jamie Anderson is analyzing the following payoff table. She is trying to choose how many salads to make in advance each day before she knows the actual demand.

Question 31

In constructing a payoff table to compute the cost of uncertainty, which of the following defines the correct order of steps taken?

A) Add the probabilities, compute the expected value for each decision, and determine the best decision using expected-value decision criterion.
B) Compute the expected value for each decision alternative, calculate the probabilities, and determine the best decision using expected-value decision criterion.
C) Add the probabilities and determine the best decision using expected-value decision criterion.
D) Add the probabilities, compute the expected value for each decision, and determine the best decision using highest values.

Question 32

A decision tree provides a "road map" for organizing events, starting with the most recent events and choices first.

Question 33

The disadvantage of the expected-value criterion is that it does not take into account the decision maker's attitude toward profit.

Question 34

Explain as clearly as possible what the "best decision" is for a business problem and what the best decision will be associated with in a certainty environment.

Question 35

When we apply the expected-value criterion, the best decision is to select the alternative with the highest average payoff or the lowest average loss.

Question 36

Decision-tree analysis provides a way to take into account future decisions when making the most current decision.

Question 37

Which of the following are not examples of non-probabilistic decision criteria?

A) Maximin decision criteria.
B) Minimum outcome criteria.
C) Maximax decision criteria.
D) Minimax regret decision criteria.

Question 38

Explain the primary difference between the business decision-making environments of certainty versus uncertainty.

Question 39

In an uncertain environment, the best decision might not result in the best outcome.

Question 40

The expected-value criterion does not include which of the following steps:

A) Compute the expected value for each decision alternative.
B) Assign probabilities to the possible outcomes associated with each alternative.
C) Define only the positive outcomes.
D) Define the decision alternatives.

Question 41

Define sensitivity analysis and how it related to cash flow.

Question 42

What is the disadvantage of the maximax and maximin criteria? What is another alternative approach?

Question 43

Identify the 4 steps of the expected-value criterion.

Question 44

Define the process of "folding back the tree" in decision tree analysis.

Question 45

Identify the 8 steps of computing the cost of uncertainty.

Question 46

Identify the 4 steps to constructing a decision tree.

Question 47

Describe the process of growing a decision tree and why it is such a valuable method of making a business decision.

Question 48

Decision tree analysis could be missing branches on the tree. Define one important consideration that could be left out.