logo

Decision Making Under Confidence

   

Added on  2020-04-07

15 Pages2518 Words286 Views
Running Head: DECISION SUPPORT TOOLSDecision Support ToolsName of the StudentName of the UniversityAuthor Note

1DECISION SUPPORT TOOLSTable of ContentsANSWER 1.....................................................................................................................................2ANSWER 2.....................................................................................................................................4ANSWER 3.....................................................................................................................................6ANSWER 4.....................................................................................................................................7ANSWER 5...................................................................................................................................10

2DECISION SUPPORT TOOLSANSWER 1(a)Decision making under certainty describes a situation where a decision maker hasto make a decision when there are all the necessary information that are required to makea decision present. Decision making under risk describes a situation where all the decisions that canbe made has a particular probability of occurrence. Decision making under uncertainty describes a situation where the decision makerhas to make a decision when there is incomplete or no information that are required tomake a decision. (b)Bikram Shrestha inherited some money and he wants to invest it in share markets,bonds, or real estates. The payoff matrix showing the profits of the markets for the nextyear are given below:Good EconomyPoor EconomyShare market$80,000($20,000)Bonds30,00020,000Real estate 25,00015,0001.An optimist would choose the alternative in which the maximum payoff ismaximized. From the following table 1, it can be seen that the maximum profitcan be earned from share markets. Thus, the decision of an optimist would be toinvest in share markets.

3DECISION SUPPORT TOOLSTable 1: Decision of an optimistGood EconomyPoor EconomyBestShare market$80,000 ($20,000)$80,000 Bonds$30,000$20,000$30,000Real estate$25,000$15,000$25,0002.A pessimist would choose the alternative in which the minimum payoff ismaximized. From the following table 2, it can be seen that the maximum profitfrom the minimum payoffs can be earned from bonds. Thus, the decision of apessimist would be to invest in bonds.Table 2: Decision of a PessimistGood EconomyPoor EconomyWorstShare market$80,000 -$20,000.00-$20,000.00Bonds$30,000 $20,000.00$20,000.00Real estate$25,000 $15,000.00$15,000.003.A criterion of regret is defined as minimizing the maximum regret. Here,regret indicates opportunity loss. Thus, regret = best payoff – payoff received.Then, the first table can be framed as follows in terms of regret. The minimumregret value has been found in Share market. Thus, the decision should be toinvest in share markets.Table 3: Regret TableGood EconomyPoor EconomyMaximumShare market$0 $40,000.00$40,000.00Bonds$50,000 $0.00$50,000.00Real estate$55,000 $5,000.00$55,000.004.It has been assumed that the probability of a good economy is 0.3. Thus,the probability of a poor economy is (1 – 0.3) = 0.7. Thus, the expected profits in Share Market = (0.3 * $80,000) – (0.7 * $20,000) = $10,000.Bonds = (0.3 * $30,000) + (0.7 * $20,000) = $23,000.Real Estate = (0.3 * $25,000) – (0.7 * $15,000) = $18,000.

End of preview

Want to access all the pages? Upload your documents or become a member.

Related Documents
Assignment on Decision Making
|16
|2487
|225

Decision Making Under Uncertainty
|16
|2900
|477

The Decision Support Tool | Assignment
|17
|2913
|33

Assignment Decision Support Tools
|18
|2463
|53

Decision Support ToOLS Undertaking Complexity: A Survey
|14
|1588
|489

Decision Support Tools- Assignment
|14
|1626
|269