Describe the phases of the decision making process.

1.Intelligence - Identify the problem. Specify objectives and the decision criteria

2.Design - Develop alternatives

3.Choice - Analyze and compare alternatives. Select the best alternative

4.Implementation - Implement the chosen alternative. Verify that desired results are achieved

 

Give two examples of the cognitive limitations.

Human mind – Based on past experience

Or if we want to buy phone, We will not choose 100000 phones. we will chose 5-10 models of phones between which we will choose that one

So it is everything what connected with human. Human can not handle all the information

Why the decisions are hard? Quote 4 general reasons (groups of reasons).

1) Structure – 1 вопрос

2) Cognitive limitations - Limited ability to process and store information and knowledge. Uncertainty - The real outcome of decision can be only predicted with some degree of certainty

3) Alternatives and Multiple Objectives - Each alternative needs to be analysed. Desired outcome is produced together with undesirable consequences. Each decision maker has multiple goals

Decision analysis

Compare decision making under uncertainty and under risk.

• Decision making under risk. - There is some knowledge of the probability of the states of nature occurring.

• Decision making under uncertainty. - There is no knowledge about the probability of the states of nature occurring.

OR

 

1)Decision Making under Uncertainty

Under complete uncertainty, either no estimates of the probabilities for the occurrence of the different states of nature are available, or the decision maker lacks confidence in them. For that reason, probabilities are not used at the choice of the best alternative.

2) Decision Making under Risk

In this case, the decision maker doesn't know which state of nature will occur but can estimate the probability of occurrence for each state. These probabilities may be subjective (they usually represent estimates from experts in a particular field), or they may reflect historical frequencies.

Which are the decision criteria under uncertainty? Which of them are for pessimistic decision maker?

 

The criteria under uncertainty include the: 1) Maximin Criterion 2) Minimax Regret Criterion 3) Maximax Criterion 4) Principle of Insufficient Reasoning. Two of them are pessimistic: Maximin Criterion and Minimax Regret Criterion

Describe the calculation of the expected value. When it is suitable?

Expected Value = ∑(Probability)(Payoff)

(The summation is calculated across all the states of nature)
And than we select the decision with the best expected payoff

It is suitable in two cases: 1)Long run planning is appropriate, and decision situations repeat themselves. 2) The decision maker is risk neutral.

 

Describe the calculation of the Expected Value of Perfect Information.

The EVPI is equal to the difference between the expected payoff under certainty (EPC), that is with the perfect prediction, and the best expected payoff without the perfect information.

EVPI = EPC – max(EMV)

OR

EVPI = ERPI – EREV, where ERPI - Expected Return without additional information,

EREV - Expected Return of the EV criterion

 

What are the payoff and the regret tables? Describe the construction of the regret table.

The payoff table is a device that a decision maker can use to summarize and organize information relevant to his decision. It is helpful in choosing among alternatives because it facilitates their comparison. The general format of a payoff table for m alternatives and n states of nature is shown in the following table

 

-Payoff table: the profit or loss of a decision.

-Regret table: Loss caused from bad decision. -> MaxMax regret criterion (of each row columne)