Decision Support Tools

DECISION SUPPORT TOOLS
STUDENT ID:
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Question 1
(a) The key advantage of using the payoff matrix is that it highlights the possible payoffs in
various scenarios which facilitates comparison. The first step in forming the payoff
matrix is to highlight the various possible states of nature and identify the possible
payoffs for the different alternatives based on underlying costs and benefits. This
information is then used to construct payoff matrix (Eriksson & Kovalainen, 2015).
(b) Decision trees have the advantage of representing the various intermediate stages which
lead to the computation of the overall payoff. In situations where it is necessary to review
these intermediate decisions or nodes, it makes sense to have a decision tree analysis as
payoff tends to highlight the potential payoff resulting from a given alternative under a
given state(Medhi, 2015).
(c) The requisite computations are carried out below.
(1) Payoff matric to represent the three possible alternatives and profit/losses under the two
market conditions is shown below (Flick, 2015).
Let
Alternative 1 ROB1
Alternative 2 ROB2
Alternative 3 To do nothing
(2) Optimum action and expected payoff if George is an optimist
The maximax decision means an optimist would maximize the maximum payoff of the
alternative(Hastie, Tibshirani & Friedman, 2016).
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The maximum among the maximum value of the alternatives would be for alternative 1.
Therefore, it can be said that George should purchase large Robot i.e. ROB1 (Hillier, 2016).
(3) Optimum action and expected payoff if George is a pessimist
The maximin decision means a pessimist would maximize the minimum payoff of the
alternatives.
No conclusion can be drawn based on this because the decision is to do nothing. It means
George should no purchase any of the robots.
(4) Optimum action and expected payoff if George follow Laplace criterion
Both alternatives show same average and thus, as per Laplace criterion, George can purchase
any of the robot.
(5) Optimum action and expected payoff if George use criterion of regret
The criterion of regret decision contains the minimizes the maximum opportunity loss. The
respective opportunity loss table for George is shown below(Hastie, Tibshirani & Friedman,
2016).
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Here, ROB2 alternative shows minimize of the maximum opportunity loss and hence, the
appropriate alternative for George would be ROB2.
(6) Optimum action and expected return when the probability of favourable market is 0.60
The expected monetary value is maximum for alternative 1 and hence, George should
purchase ROB1(Lind, Marchal & Wathen, 2016).
(7) Expected value of perfect information
Cost of survey = $5000
Expected value of best decision with sample information = $23,802
Expected monetary value of best decision without sample information = $14,000
Now,
EVPI = (23802-14000) = $9802
EVPI = (50,000) *0.6 + (0) *0.4 -14000 = $16, 000
Question 2
Cost of survey = $5000
(a) Let S1 indicate favourable market and S2 indicate unfavourable market
Y1 = Result is positive
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