BUS 221 Lecture Notes - Lecture 4: Richard Branson, Entscheidungsproblem, Shell Corporation
27 Jan 2017
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Expected value or expected utility of an action. More value or more utility is better. When you"ve got 2 options (i. e. 2 possible acts) in front of you, compare the expected value/utility of each. Where dollar amounts are available, consider using them (to calculate expected value) If not, we need to estimate the utility of each outcome to the people involved, then maximize. To put a decision situation into mathematical terms is to build a model of it. Model: a simple & abstract representation of something complex; has enough detail, but not too much. To model a decision problem, you need to specify (3 essential components): the possible acts, the possible states of the world, the outcomes. What we"ve done so far assumes you"re trying to get more -> either more money or more satisfaction. Imagine insurance costs /year for your ,000 house; insurance replaces your house if it burns down; assume 1% chance of such a fire per year.
