Assignment: Maximizing Expected Utility and Decision Trees

Assignment: Maximizing Expected Utility and Decision Trees

As explained in this week’s resources, maximization of expected utility involves the following five steps of decision making:

1. Identifying future conditions, along with the likelihood of the condition being realized

2. Listing possible alternatives

3. Estimating the payoff or utility for each alternative under each future condition

4. Calculating the expected utility

5. Selecting the best alternative

Decision trees can be used to illustrate all of this information in a graphic manner.

In this Assignment, apply the information from this week’s resources to solve decision problems and complete a Decision Analysis for those problems. Solve problems 5, 10, and 11 on pp. 231–234 of the Stevenson text by creating decision trees, determining expected utilities of the decision alternatives, and offering recommended decisions based on the decision tree analysis.

Approximate length: 4–5 pages

Submit your Decision Analysis for the assigned problems by Day 3.

To submit your Assignment, click on Assignments on the course navigation menu. Locate theAssignment Turnitin – Week 5 link, then click on the View/Complete link, and follow the on-screen instructions for submitting your Assignment.

 

6. What are some of the reasons for poor decisions?

10. Explain or define each of these terms:

a. Laplace criterion.

b. Minimax regret.

c. Expected value.

d. Expected value of perfect information

 

11. What information does a decision maker need in order to perform an expected-value analysis of

a problem? What options are available to the decision maker if the probabilities of the states of

nature are unknown? Can you think of a way you might use sensitivity analysis in such a case?