BU275 Lecture Notes - Lecture 1: Prior Probability, Decision Table, Expected Value Of Perfect Information
Document Summary
Build a decision table (decision alternatives and outcomes), then summarize the data using numbers and choose an alternative. outcomes are mutually exhaustive, do not depend on previous decisions, states of nature. Real estate investment problem decision alternatives: apartment, office, or warehouse payoffs: the profits/losses incurred outcomes: good economy or bad economy. *note: we can eliminate the warehouse option because the apartment is always a better alternative. Maximax: use the maximum value that can be obtained (apartment = 50; office = 100) excel formula: =max() use for each decision alternative. Maximin: use the maximum of the minimums available value that can be obtained (apartment: 30, oice = -40) trying to maximize proits in the worst situation excel formula: =min() use for each decision alternative. Equally likely: find the average of all outcomes of a decision alternative (apartment: (30+50)/2. Regret formula: regret depends on how the outcome of the decision differs from the best possible outcome.
