Decision Analysis and Decision Making : Assignment

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Added on 2020-03-23

Decision Analysis and Decision Making : Assignment

Added on 2020-03-23

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Decision Analysis and Decision Making : Assignment_1

Table of ContentsQuestion 1: Decision Analysis.............................................................................................................................3Question 2: Value of information........................................................................................................................7Question 3: Monte Carlo Simulation...................................................................................................................9Question 4: Regression Analysis........................................................................................................................10Question 5: CVP Analysis...................................................................................................................................14References........................................................................................................................................................17

Decision Analysis and Decision Making : Assignment_2

Question 1: Decision Analysis(a)Decision Making under CertaintyThe decision making under certainty is identifying the best option or alternativeand tooptimize theoutcome.In decision making under certaintythe various outcomes are known and theirvaluesarecertain. Hence the task is merely to optimize the required criterion such astominimize thecost ortomaximize the profits. Since perfect information is rarely available on all the variousparameters impacting decision, hence this technique(decision making under certainty)is less oftenused.Moreover in normal circumstancesthere is costofinformation hence thiscost aspectalso needsto be analyzedandexpected value of perfect information (EVPI)needs to be calculated. E.g. If youwant to make a decision of buying a soap ‘Dove’ or ‘Pears’ and the benefits of both the soaps aresame, then cost of soaps are considered. Pears soap is cheaper than Dove, so the decision will be tobuy Pears.Decision Making under RiskIn decision makingunder risk,the outcomes are known as alsotheprobabilitiesof occurrence areknownand in such scenario, instead of optimizing the outcome weinsteadoptimize the expectedmonetary value (EMV) of outcome. The highest EMV will be selected. E.g. if there is 1% probabilityof earning $1000 in option A while there is 90% probability of earning $ 50 in option B , the optionB shall be preferred as the EMV of option B is $ 45 (90% of $ 45) rather than EMV of $ 10 in optionA (1% of $ 1000).Decision Making under Complete Uncertainty

Decision Analysis and Decision Making : Assignment_3

Under uncertainty, only the outcomes are known but not their probability. Here the selection is basedon maximax, maximin or equally likely methods for the positive or cautious or neutral perspective/srespectively. (b)Good EconomyPoor EconomyProbability0.30.7Share Market80000-20000Bonds3000020000Real Estate2500015000Table 11.S. NoGood EconomyPoor EconomyBest Result (Max)1ShareMarket80000-2000080000 (Max 80000,-20000)2Bonds300002000030000 (Max 30000,20000)3Real Estate250001500025000 (Max 25000,15000)80000(Max(80000,30000,25000))Table 2As per Table 2, the optimist would choose share market investment because the share marketreturns (under best conditions) are the maximum of the maximum returns in any investmentgroup i.e. return of $80,000 [maximax][ CITATION csu141 \l 1033 ]2.S. NoGood EconomyPoor EconomyBest Result (Min)1Share Market80000-20000-20000 (Min 80000,-20000)2Bonds300002000020000 (Min 30000,20000)3Real Estate250001500015000 (Min 25000,15000)20000(Max(-20000,20000,15000))Table 3

Decision Analysis and Decision Making : Assignment_4

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