# Decision Analysis

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DECISION MODELS

Decisions Making Under Uncertainty Decisions Making Under Risk

1. Max-Min Criteria (pessimist) 1. Expected Payoff (Average)
- Best of the worst A. Multiply payoffs by probabilities and
-Becomes (Min-Max) if loss table add up. (For each action separately)
A. Find min (max) in each row B. Pick best action
B. Pick the best of the Max (Min) 2. Expected Opportunity Loss A. Set up loss matrix -Subtract all numbers in each column Criteria Max-Max Criterion (Optimist) from the largest number in that column
-Best of the best B. Find average opportunity loss Becomes (min-min) if loss table for each action.
A. Find max (min) in each row - multiply the probability time loss and B. B. Pick the largest (smallest) add up. C. Pick smallest number (want to min loss)

3. Most Probable State of Nature
3. Weighted Average Criterion A. Determine the most probable state of nature - Coef. of Optimism = α (one with highest probability)
- Optimistic=1, pessimistic=0
A. Calculate weighted value B. Pick the action with the highest expected α (best) + (1 - α) (worst) payoff. B. Pick best value C. Good criteria for a non-repetitive Decision

4. Minimizing Regret 5. Expected Value of Perfect Information

- Savage opportunity loss criteria A. Fix a state of nature.
A. Set up opportunity loss matrix B. Pick largest value in each column
- subtract the largest number in each column from all other numbers C. Multiply prob. X largest values in that column and add up = ERPI ERPI=Expected Return of Perfect Info)
B. Find max regret in each row D. EVPI = ERPI - Average...

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