Decision Theory Introduction Decision theory (DT) represents a generalized approach to decision making. It enables the decision maker: QUMT 2398 To analyze a set of complex situations with many alternatives and many different possible Consequences To identify a course of action consistent with the basic economic and psychological desires of the decision maker Types Of Decision-Making Environment Certainty Decision Maker knows with certainty what the state of nature will be only one possible state of nature Decision Theory A set of alternative actions . We may choose whichever we please A set of possible states of nature Only one will be correct, but we don't know in advance A set of outcomes and a value for each Each is a combination of an alternative action and a state of nature Value can be monetary or otherwise Ignorance Decision Maker knows all possible states of nature, but does not know probability of occurrence . Risk Decision Maker knows all possible states of nature, and can assign probability of occurrence for each state Identify the problem 2. Specify objectives and the decision criteria for choosing a solution Types Of Decision-Making Environment (Con.) 1. Decision Making Under Curtainty 2. Decision Making Under Uncertainty * Optimism (Marimar or Miniministerio (Maximior Minis terio Equal babies (Laplace) Celerion Calicles of Realism (Hurwie) Criterion Develop alternatives Steps Of Decision Theory 4 Analyse and compare alternatives Select the best alternative 3. Decision Making Under Risk EMV (pected Monitory BOL pled party ) 6. Implement the chosen alternative Verify that desired results are achieved -8b3b3/27501125?response content disposition=inline%3B%20filename%2A%3DUTF-8%27%27C64 DT Notes. Decision analysis Under Uncertainty | Ma Xmax Criterion + KHI CHUton. Maximizes the maimum payoff If you are an op , you will decide on the basis of Maximax Example There are four projects; I can select only one. The payoff table shows potential "payoff depending upon likely economic conditions. Alternatives Alternatives Step 1: Pick the max value for each alternative. Since the payoff in Economic Condition project is higher than Recession Normal Boom the payoff for for sood $100 overy economic condition, we say that project is dominant 7000 10371 We can eliminate project from consideration. Project A Project B Project C Proloco Economic Condition Recession Normal Boom 4 075 5000 5100 d 525012080 250d Tood 10175 Project A Project BD Prolet C Step 2:Then pick the alternative with max payoff. Maximin criterion Equally Likely (Laplace) Criterion Highest average payoff f you are a conservative, you will use Maximin Alternatives Economic Condition l Recession Normal Boom 4 0755000 ice for each alternative. Alternatives Project A Project B Project C 40755009.610 Economic Conde Recession Normal Boom Average 4075 sood 6100 d 5250 120805776 67 Tood 1037 G625.000 T Project A Project B Project C Pick the alternative with Equally likely 1 Criterion of realism (Hurwicz) coefficient of realium 0.45 Realism payoff for alternative (Maximum payoff for alternative) (1 - ) (Minimum payoff for alternative) Alternatives Economic Condition Recession Norm Boom WT. AVG. Project A 407% sood 6100 49562 Project B d 52501209d5436.00 Project C 2500 7000 1037 6043.7 Minimax Regret criterion Alternative Economic Condition You are the optimis nor conservative Recession Normal Boom Protect od 5100 Step decular Project B Project Tood 10375 Alamat Regre Table Set 2: Prepare "Regret Table by subtracting each outcome coll value from its Project A Project B Pick the alternative with Maxweighted average. Project C Realism Step 3: Pick the maxim regret value for each alternative to be continued on next page) QUESTION 6 Which of the following would not be included in the measurement of GDP? Hint Are financial transactions included in GOP? O a bill from a car mechanic wages of a card dealer working in a Las Vegas casino commissions of a stockbroker the purchase of 1,000 shares of Apple stock cand d QUESTION 7 Net exports equals exports divided by imports. the sum of exports and imports. exports minus imports. exports during the year. none of the above QUESTION 22 A business cycle refers to the o continued expansion in Real GDP. O recurrent swings (up and down) in Real GDP. continued decline in Real GDP. period when Real GDP grows at unusually high rates. none of the above QUESTION 25 Suppose that nondurable goods spending is $200 billion, durable goods spending is $400 billion new residential housing spending is $500 billion and spending on services is 5700 billion What does consumption equal 5600 bin $1,100 billion 51.000 bilion 51,300 billion There is not enough information to answer this question QUESTION 28 According to the CIA World Fact Book, the US real growth rate in 2017 was Note: 2017 is the latest year available in the CIA World Fact Book 3.7% 22% 1.4% O 2.9% QUESTION 29 According to the CIA World Fact Book, US GDP per capita in 2017 was $58.000 $65,000 $60,000 $59,800 QUESTION 30 According to the CIA World Fact Book, the country with the fourth largest GDP is India Japan Germany United Kingdom