Advantages of Payoff Matrix and Decision Trees

Running head: ASSESSMENT ITEM 3
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Assessment Item 3
Name
Institution

ASSESSMENT ITEM 3
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Assessment Item 3
Question 1
a). Advantages of payoff matrix
Payoff matrix encompasses stimulating an individual to determine the disadvantages and the
advantages of a behavior or action together with the disadvantages and advantages of not
undertaking the behavior or action (Parks & Hulbert. 2015).
It can be utilized to assist an individual choose whether to halt smoking marijuana.
Steps required in developing the payoff matrix
Understand objects and identify the decision situation (Dufournaud. 2012).
Determine the alternatives.
Model and decompose the problem.
Select the ideal alternative.
Execute the selected alternative.
b). Advantages of decision trees
1. They absolutely undertake feature selection or screening (Kingsford, C., & Salzberg, 2018).
2. They need comparatively small effort for preparation of data
3. Nonlinear associations between parameters do not influence the performance of the tree.
Decision trees are preferred to payoff matrix because it is easy to explain to executives and easy
to interpret (Quinlan, J. R. 2017).
C.) (1)
Event 1 Event 2
Probability 0.6 0.4
Alternative 1 50,000 -40,000
Alternative 2 30,000 -20,000

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Alternative 3 0 0
EMV (alternative) = ($ 50,000)(0.6) + (-$ 40,000)(0.4)
= $ 14,000
EMV (alternative) = ($ 30,000)(0.6)+ (- 20,000)(0.4)
= $ 10,000
EMV (alternative 3) = 0
The ideal option is to buy the, the large robot
2.) The decision that is optimistic. These are 50,000, 30,000, and 0.
The decision is to buy the large robot (alternative 1).
Event Event
Probability 0.6 0.4
Alternative 1 50,000 -40,000
Alternative 2 30,000 -20,000
Alternative 3 0 0
3). The decision that is pessimist. These are -40,000, -20,000, and 0.
The decision is to do nothing.
4). Laplace criterion
Average (alternative 1) = [$ 50,000 + (-40,000)]/2
Average (alternative 2) = [$ 30,000 + (- $ 20,000)]/2
=$ 5,000
Average (alternative 3) = 0
5). Criterion of regret
Alternatives Favorable market Unfavorable market Maximum in row
Rob 1 0 40,000 40,000
Rob 2 20,000 20,000 20,000
Nothing 50,000 0 50,000

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6). EMV (alternative 1) = ($ 50,000)(0.6) +(-$ 40,000)(0.4)= $14,000
The option that minimizes the maximum opportunity loss is Rob 2.
7). Rob 1 has a maximum opportunity cost of $ 40,000
2a.
Results of survey Favorable market (FM) Unfavorable Market
Positive (P) P (P)FM)-0.9 P(P UM)-0.2
Negative (N) P (N) FM)-0.1 P(N UM)-0.8
P (FM) =0.6 P (UM) = 0.4
Probability revision given a positive survey outcome
State of nature Conditional
probability
Prior prob Joint prob Posterior
probability
FM 0.9 0.6 0.54 0.54/0.62-0.871
UM 0.2 0.4 0.08 0.08/0.62-0.842
Total 0.62 1.00
b). EVSI=$ 23,802-$ 14,000 = 9,802
ENGSI=$ 23,802-$ 5000 = 18,802
d). $ 23,802
3.
Demand Probability No-shows Proba
5 0.05 0 0.15