Problem 1: The following payoff table shows profit for a decision analysis problem with two decision alternatives

and three states of nature: State of Nature Decision Alternative D1 D2 250 100 S1 100 100 S2 25 75 S3

A. Construct a decision tree for this problem. B. If the decision maker knows nothing about the probabilities of the three states of nature, what is the recommended decision using the optimistic, conservative and minimax regret approaches?

250 Solution: A. D1 100 25 D2 100 100 75

B. [Please refer to the attachment Decision Analysis.xlsx, Solution-1 for

detailed calculations and answers]

2. Suppose that a decision maker faced with four decision alternatives and four states of nature develops the following profit payoff table: State of Nature Decision Alternative D1 D2 D3 D4 S1 14 11 8 S2 9 10 9 10 S3 10 8 10 11 S4 5 7 10 13

11

A. If the decision maker knows nothing about the probabilities of the four states of nature, what is recommended decision using the optimistic, conservative and minimax regret approaches? B. Which approach do you prefer? Explain. Is establishing the most appropriate approach before analyzing the problem important for the decision maker? Explain. C. Assume that the payoff table provides cost rather than profit payoffs. What is the recommended decision using the optimistic, conservative and minimax regret approaches? Solution:

A. [Please refer to the attachment Decision Analysis.xlsx, Solution-2-A

for detailed calculations and answers]

B. The Minimax Regret decision is preferable. It tends to reduce the risk

involved in decision making. Establishing the most appropriate approach before analyzing the problem is very important for the decision maker. The decision maker can choose the correct decision alternative according to his requirements and risk appetite.

C. [Please refer to the attachment Decision Analysis.xlsx, Solution-2-C

for detailed calculations and answers]