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Decision Theory Quiz

The document discusses key concepts in decision making including decision alternatives, states of nature, and payoffs. It then provides an example payoff table for three investment options (stocks, real estate, restaurant) under two states of nature (good or bad economic conditions). It asks which investment would be chosen using different decision making criteria: maximax, maximin, minimax regret, Hurwicz, and equal likelihood. Calculations are shown applying each criteria to the example payoff table, with real estate chosen by maximin and minimax regret, stocks by Hurwicz, and restaurant by maximax and equal likelihood criteria.

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381 views

Decision Theory Quiz

The document discusses key concepts in decision making including decision alternatives, states of nature, and payoffs. It then provides an example payoff table for three investment options (stocks, real estate, restaurant) under two states of nature (good or bad economic conditions). It asks which investment would be chosen using different decision making criteria: maximax, maximin, minimax regret, Hurwicz, and equal likelihood. Calculations are shown applying each criteria to the example payoff table, with real estate chosen by maximin and minimax regret, stocks by Hurwicz, and restaurant by maximax and equal likelihood criteria.

Uploaded by

Aurora
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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D 1.

The options from which a decision maker chooses a course of action are
a. called the decision alternatives.
b. under the control of the decision maker.
c. not the same as the states of nature.
d. All of the alternatives are true.

A 2. States of nature
a. can describe uncontrollable natural events such as floods or freezing temperatures.
b. can be selected by the decision maker.
c. cannot be enumerated by the decision maker.
d. All of the alternatives are true.

C. 3. A payoff
a. is always measured in profit.
b. is always measured in cost.
c. exists for each pair of decision alternative and state of nature.
d. exists for each state of nature.

B 4. Making a good decision


a. requires probabilities for all states of nature.
b. requires a clear understanding of decision alternatives, states of nature, and payoffs.
c. implies that a desirable outcome will occur.
d. All of the alternatives are true.

D 5. A decision tree
a. presents all decision alternatives first and follows them with all states of nature.
b. presents all states of nature first and follows them with all decision alternatives.
c. alternates the decision alternatives and states of nature.
d. arranges decision alternatives and states of nature in their natural chronological order.

Consider the following pay-off table for each of the investment under two state of nature:

Good economic Bad economic


condition condition
Stocks 200,000 0

Real State 25,000 5,000

Restaurant 300,000 -50,000

Which investment will be chosen under:


1. Maximax
2. Maximin
3. Minimax Regret
4. Hurwicz
5. Equal Likelihood

Show your supporting calculations.


MAXIMAX:

Good economic Bad economic


condition condition
Stocks 200,000 0

Real State 25,000 5,000

Restaurant 300,000 -50,000

Maximum pay off

MAXIMIN:

Good economic Bad economic


condition condition
Stocks 200,000 0

Real State 25,000 5,000

Restaurant 300,000 -50,000

Maximum pay off

MINIMAX REGRETS:

GOOD ECONIMIC CONDITION BAD ECONOMIC CONDITION

$ 300,000 - 200,000 = 100,000 $5,000 – 0 = 5,000


$ 300,000 - 25,000 = 275,000 $5,000 – 5,000 = 0
$ 300,000 - 300,000 = 0 $5,000 – (-50,000) = 55,000

STATE OF NATURE

GOOD ECONOMIC CONDITION BAD ECONOMIC CONDITION

STOCK $ 100,000 $ 5,000

REAL STATE $ 275,000 0

RESTAURANT 0 $ 55,000

HURWICZ:

DECISIONS VALUES
STOCK $ 200,000 (.3) + 0 (1-.3) or (.7) = $60,000
REAL STATE $ 25,000 (.3) + 5,000 (.7) = 11,000
RESTAURANT $ 300,000 (.3) – 50,000 (.7) = 55,000
$60,00, Thus. The decision would be to purchased stock.

EQUAL LIKELIHOOD

DECISIONS VALUES

STOCK $ 200,000 (.50) + 0 (.50) = 100,000


REAL STATE $ 25,000 (.50) + 5,000(.50) = 15,000
RESTAURANT $ 300,000 (.50) – 50,000 (.50) = 125,000

MAXIMAX – RESTAURANT
MAXIMIN- REAL STATE
MINIMAX REGRET – REAL STATE
HURWICZ- STOCK
EQUAL LIKELIHOOD – RESTAURANT

- Majority among the criterion is the real state and restaurant. if I will choose, I am going to pick the
restaurant.

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