BUS 336 Lecture Notes - Lecture 3: Decision Analysis, Emv, Weighted Arithmetic Mean
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Decision analysis: analytic and systematic approach to the study of decision making. A good decision is one that is based on logic, considers all available data and possible alternatives and applies specific repeatable processes. Identify possible outcomes or states of nature outside of one"s control. List payoff (conditional values, typically profits) of each combination of alternatives and outcomes. Select one of the mathematical decision theory models. Decision making under certainty: decision maker knows with certainty the consequences of every alternative or decision. Identify best result and choose path to achieve it (trivial) Decision making under uncertainty: there are undetermined states of nature and the decision maker does not know the probabilities of the various possible outcomes. Choose which criteria you will use then follow the steps. Decision making under risk: there are undetermined stats of nature and the decision maker has working values for the probabilities of the various possible outcomes.