Decision Support Tools

DECISION SUPPORT TOOLS
STUDENT ID:
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Question 1
(a) Payoff matrix usage allows the user to evaluate the payoffs associated with various
choices and then make a suitable choice and determine the incremental advantage in
comparison to the other options. For forming the payoff matrix, it is essential that the
decision maker must outline various choices along with the possible states and their likely
of occurrence. This input data would be useful in estimating the payoff associated with
each choice which can be then for decision making (Eriksson & Kovalainen, 2015).
(b) One major difference between decision tree and payoff matrix is that the former is
capable of showing the various intermediate choices and indicate how the change in
intermediate choices would impact the final outcome in terms of superior choice or higher
payoff. This is not explicit in case of payoff matrix. As a result, decisions trees are
preferred in situations where there the intermediate stages tend to be dynamic owing to
which a better understanding regarding these may be required. (Fehr & Grossman,2016).
(c) (1) George has three key alternatives as listed below.
 Buy Robot 1
 But Robot 2
 Do not buy any robot
Payoff matrix
(2) George: Optimist
Maximax value is $50,000 which shows the optimal action is to make a purchase of robot 1.
(3) George: Pessimist
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Maximin value is $0 which shows the optimal action is to make not purchase robot.
(3) George adopts Lapalce Criterion
Maximum average is equal for both the initial alternatives and hence, the optimal action is to
make purchase robot 1 or robot 2.
(4) George adopts Criterion of Regret
The minimal value of the maximum opportunity cost will be optimal action under criterion of
regret. Here, the minimal value of max opportunity cost is for robot 2 and therefore, the
optimal action is to make a purchase of robot 2.
(5) Expected monetary value method
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Maximum EMV has obtained for robot 1 and thereby, the optimal action is to make a
purchase of robot 1.
(6) EVPI
EVPI = {(0.6 ∗ 50000) − (14000)} = $16,000
Question 2
Assumption
S1 = Favourable market
S2 = Unfavourable market
Y1 = Positive
Y2= Negative
(a) Computation of revised prior probabilities
P(Y 1∨S 1)= ( 0.6∗0.9 )
{ ( 0.6∗0.9 ) + ( 0.4∗0.8 ) } =0.627
P(Y 1∨S 1)= ( 0.4∗0.8 )
{ ( 0.4∗0.8 ) + ( 0.6∗0.9 ) } =0.327
P(Y 1∨S 1)= ( 0.4∗0.2 )
{ ( 0.4∗0.2 ) + ( 0.6∗0.1 ) } =0.571
P(Y 1∨S 1)=1− ( 0.4∗0.2 )
{ ( 0.4∗0.2 ) + ( 0.6∗0.1 ) }=0.429
(b) Posterior probabilities
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