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Decision Making Models

Suppose that a decision maker faced with four decision alternatives and four states of nature develops the following payoff table:
Decision State of Nature
Alternatives S1 S2 S3 S4
D1 909 1117 952 307
D2 252 457 505 1088
D3 1108 643 1075 841
D4 1120 558 629 1178

a) What alternative would you recommend to an optimistic decision-maker? What is the expected payoff of this decision?
b) What alternative would you recommend to an pessimistic decision-maker? What is the expected payoff of this decision?
c) What alternative would you recommend using the equal-likelihood criterion? What is the expected payoff of this decision?
d) What alternative would you recommend using the minimax regret criterion? What is the expected payoff of this decision?

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Please refer attached file for better clarity of tables.

a)
A optimistic decision maker will use the Maximax decision rule to make a decision.

State of Nature Maximum
Decision Alternative S1 S2 S3 S4 Payoff
D1 909 1117 952 307 1117
D2 252 457 505 1088 1088
D3 1108 643 1075 841 1108
D4 1120 558 629 1178 1178

Maximum of maximum payoffs is $1178. He should choose D4. Expected payoff is 1178.

b)
A pessimistic decision maker will use the Maximin decision rule to make a decision.
The maximin criterion suggests that the decision-maker should
choose the alternative which ...

Solution Summary

The solution chooses the best alternative by using the different decision models.

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