MS&E 252 Handout #7

Decision Analysis I October 14
th
. 2004

Page 1 oI 8 HW #3
Homework Assignment #3
Due on Thursday Oct. 21
st
11:59 pm


In this assignment you are required to turn in the probabilistic section only. Again the
"Food Ior thought" section is optional but will help you think in depth about the concepts
covered and will help with your grade on participation. As mentioned in the course guide.
we will expect Iull knowledge oI all sections on this assignment.

Assigned Reading
1. Collection of Readings: The Evolution oI Decision Analysis by ProI. Howard.
2. ~How SmithKline Beecham Makes Better Research-Allocation Decisions¨
Harvard Business Review. March 1998 Tom Keelin and Paul Sharpe.
3. The Foundation of Decision Analysis: Iinish reading chapter 1.

Distinctions
From the class lectures. explain the Iollowing concepts:
• Expert
• Clairvoyance
• Value oI Clairvoyance
• Distinctions
− Name
− Kind
− Degree
− Clear
− Observable
− UseIul
• Clarity Test
• Mutually Exclusive
• Collectively Exhaustive
• Decision Basis
• Probability
• Background State oI InIormation
• Associative Logic Error
• Relevance
• Possibility


Probabilistic Questions: (Submit solutions on the class web page)

1) Eric has two quarters in his pocket. He believes that both are equally likely to land
'heads¨ or 'tails¨. and that how one coin lands gives him no inIormation about how
the other one will land. Eric closes his eyes. and both coins are tossed. Gael (who
didn`t close his eyes) tells Eric that at least one quarter landed 'heads¨. What
probability should Eric assign to the other quarter landing 'heads¨ as well?

a) 1/4
b) 1/3
c) 1/2
d) 2/3



MS&E 252 Handout #7
Decision Analysis I October 14
th
. 2004

Page 2 oI 8 HW #3

2) Consider the Iollowing events:

A: It will rain in Berkeley on the day oI the Big Game against Cal this year
A`: It will not rain in Berkeley on the day oI the Big Game against Cal this year.
B: StanIord will win the Big Game this year.
B`: StanIord will not win the Big Game this year.

The StanIord head coach has been interviewed about these two events. He assigns a
0.2 probability to the occurrence oI event A given &. a 0.82 probability to the
occurrence oI event B given &. and a 0.08 probability to the occurrence oI event A`B`
given & (¦A`B`'&}). In what range does ¦A'B`&} lie?

a) More than 0.5
b) More than 0.25. but less than or equal to 0.5
c) More than 0.1. but less than or equal to 0.25
d) Less than or equal to 0.1

3) Which oI the Iollowing statements describes why it is important Ior a distinction
to pass the clarity test?

a) No value oI inIormation can be calculated without clarity on each oI the
distinctions in a decision problem.
b) Without the clarity test. the clairvoyant cannot determine which degree oI a
distinction has occurred.
c) II the distinction has not passed the clarity test. then we will have to assign a
probability range rather than a single number which will hinder the accuracy oI
the analysis.
d) By using the clarity test. a decision analyst will ensure that people discussing the
decision problem can communicate inIormation about an uncertainty without
conIusion.

4) How many oI the Iollowing statements must be true?
I. Consider two distinctions A and B. II you think that 0 · ¦A'&} · 1 and 0 · ¦B'&}
· 1. then iI A and B are mutually exclusive they cannot be irrelevant.
II. Consider two distinctions A and B. II you think that 0 · ¦A'&} · 1 and 0 · ¦B'&}
· 1. then iI A and B are irrelevant they cannot be collectively exhaustive.
III. The Iollowing is an example oI associative logic error: '100° oI the people who
won the lottery played. so you have a good chance oI winning iI you play.¨
IV. The Iollowing is an example oI associative logic error: 'StanIord loses on average
90° oI its games against Berkeley. and Berkeley wins about halI oI its games
MS&E 252 Handout #7
Decision Analysis I October 14
th
. 2004

Page 3 oI 8 HW #3
against UCSD. II StanIord played against UCSD. they would have a lesser chance
oI winning than Berkeley does against UCSD.¨

a) 0 or 1
b) 2
c) 3
d) 4

5) Which oI the Iollowing statements best corresponds to the Iollowing relevance
diagram?



a) ¦ABC'&} ÷ ¦C'A.&}¦C'B.&}¦A'&}¦B'&}
b) ¦ABC'&} ÷ ¦A'&}¦B'&}¦C'&}
c) ¦ABC'&} ÷ ¦B'C.&}¦C'A.&}¦A'B.&}
d) ¦ABC'&} ÷ ¦A'&}¦B'&}¦C'A.B.&}

6) Three prisoners (A. B. and C) have been sentenced to death. Two oI them have since
been pardoned. although none oI them knows it yet. Prisoner A assigns equal
probabilities to the outcomes 'A will be executed¨. 'B will be executed¨. and 'C will
be executed.¨
Prisoner A asks the guard to tell him who will be put to death. The guard reIuses. but
arranges to tell him one oI the prisoners who was pardoned. under the Iollowing
conditions:
II A is scheduled to be executed. the guard will Ilip a coin (that A believes to be
Iair) to choose whether to say 'B pardoned¨ or 'C pardoned.¨
II B is scheduled to be executed. the guard will say 'C pardoned.¨
II C is scheduled to be executed. the guard will say 'B pardoned.¨

The guard then says 'B pardoned.¨ What probability should A then assign to A being
executed?
A B
C
MS&E 252 Handout #7
Decision Analysis I October 14
th
. 2004

Page 4 oI 8 HW #3
a) 1/6
b) 1/3
c) 1/2
d) None oI the above.

7) Steve is graduating Irom MS&E in June. and he is currently considering his Iuture
career plans. He would like to go into either consulting or investment banking. and
he will receive exactly one iob oIIer in one oI the industries mentioned. He believes
the probability oI getting a iob in consulting to be 0.6 and in investment banking to be
0.4. He is interviewing with two consulting companies: a small Iirm. O`Kinsey Co..
and a large Iirm. American Consulting Group. He is also interviewing with two
investment banks: a small Iirm. JM Porgan. and a large Iirm. Silverman Sachs. II
Steve is oIIered an investment banking iob. he believes the probability oI getting an
oIIer Irom a large Iirm is 0.8; iI he is oIIered a consulting iob. he believes the
probability oI getting an oIIer Irom a large Iirm is 0.9.
Steve is also uncertain about iob location. but he knows he will either be in New York
or San Francisco. II he gets an investment banking iob Irom a small Iirm. he believes
he will end up in New York with probability 0.7; however. iI he gets an oIIer Irom a
large investment bank. he will deIinitely go to New York. as Silverman Sachs does
not have oIIices in San Francisco. II Steve is oIIered a consulting iob. he believes he
is equally likely to be in New York or San Francisco. regardless oI whether the Iirm is
small or large.
Given that Steve is oIIered an investment banking iob in New York. he assigns a
probability. p. oI receiving an oIIer Irom JM Porgan. Which oI the Iollowing
statements best describes p?
a) 0 < p · 0.1
b) 0.1 < p · 0.2
c) 0.2 < p · 0.3
d) p > 0.3

8) Given that Steve is oIIered a iob Irom a large Iirm. he assigns a probability. q. oI
receiving a iob oIIer in San Francisco. Which oI the Iollowing statements best
describes q?
a) 0 < q · 0.1
b) 0.1 < q · 0.2
c) 0.2 < q · 0.3
d) q > 0.3

9) Consider the Iollowing three distinctions:
- Class Difficultv (X). with degrees 'Easy¨ and 'DiIIicult;
- Student Effort (Y). with degrees 'Lazy¨ and 'Hard-Working¨;
- Student Grade (Z). with degrees 'A¨ and 'B or less¨.
MS&E 252 Handout #7
Decision Analysis I October 14
th
. 2004

Page 5 oI 8 HW #3
The Iollowing table provides a ioint probability distribution over these distinctions:

Class Difficulty - Student Effort - Student Grade Probability
DiIIicult Lazy B or Less 0.18
DiIIicult Lazy A 0.02
DiIIicult Hard-Working B or Less 0.08
DiIIicult Hard-Working A 0.12
Easy Lazy B or Less 0.15
Easy Lazy A 0.15
Easy Hard-Working B or Less 0.03
Easy Hard-Working A 0.27

How many oI the Iollowing statements are true?
I. Given iust &. a student is strictly more likely to be lazy than hard-working;
II. X is irrelevant to Y given &;
III. A hard-working student in a diIIicult class is more likely to get an A than a
lazy student in an easy class;
IV. X is relevant to Y given Z and &.

a) 0
b) 1
c) 2
d) 3 or 4.

10) Which oI the Iollowing relevance diagrams describes the relationships between
distinctions X. Y and Z as characterized in the previous question?

a)

Z
X
Y
MS&E 252 Handout #7
Decision Analysis I October 14
th
. 2004

Page 6 oI 8 HW #3
b)


c)

d)


Quantitative Problems:

1) The Draeger`s grocery store in Menlo Park will buy Reggiano Parmesan cheese Irom
any supplier Ior $2.000 per 100-pound wheel.

a. State your personal indiIIerent buying price Ior the event "Getting a 100-pound
wheel oI Reggiano Parmesan cheese. eating what you want (over time) and
throwing away the rest." BrieIly explain your choice.

b. A Iriend oI yours owns a 100-pound wheel oI Reggiano Parmesan cheese. He
invites you to bid on the wheel. State the maximum amount you would bid.
BrieIly explain your choice.

c. Summarize the diIIerences and similarities in your answers to parts a and b.

2) Aruna. a risk-neutral test taker. has been studying Ior the Decision Analysis midterm.
The midterm has IiIteen questions and each question has Iour possible answers. The
midterm is diIIerent Irom any she has taken beIore in the Iollowing respect: instead oI
Z
X
Y
Z
X
Y
Z
X
Y
MS&E 252 Handout #7
Decision Analysis I October 14
th
. 2004

Page 7 oI 8 HW #3
iust marking the answer she thinks is correct (a. b. c. or d) -- she assigns a probability
to the chance that each answer is correct. The sum oI the probabilities she assigns Ior
each question must equal to one. The score Ior each question is given by the
Iollowing Iormula: (normalized Ior a possible 100 points on the exam):

Score ÷ 100 ¹ 100 *ln p
15 15 ln 4

where p is the probability she assigns to the correct answer.

Suppose she believes that ¦a correct ' &} ÷ 0.7 and ¦b correct ' &} ÷ ¦c correct ' &} ÷
¦d correct ' &} ÷ 0.1. This can be represented as the Iollowing deal:
b. c. or d correct
a correct
0.3
0.7
100 ¹ 100 ln p
15 15 ln 4
100 ¹ 100 ln((1-p)/3)
15 15 ln 4


(For simplicity. we assume that probability is equally distributed among choices b. c
and d.) II Aruna wants to maximize her e-score. what probability. p. should she write
down Ior answer (a)? (Show your reasoning) This question requires some calculus
background and is not generally representative oI exam questions. It is meant more Ior
your understanding oI the probabilistic test taking method than class concepts.

3) Consider what the weather might be on October 21. 2005. II we are considering
planning an outdoor birthday party Ior this day. we may think that two distinctions
about the weather are important: whether or not it rains. and what the temperature is.
We may even believe that they are relevant to each other.

a. Let R designate the event that it rains. Formulate the distinctions R and ¬R
(where ¬R means "Not R") so that they are mutually exclusive and collectively
exhaustive. Subiect your distinctions to the clarity test. Let W represent that the
same day is warm and ¬W represent not warm. Formulate this distinction clearly.
Without attaching any numbers. draw a tree and label all the possibilities created
by these two distinctions.

b. Let & stand Ior your background state oI inIormation. In words deIine the
Iollowing: ¦¬R'&}. ¦W'¬R. &}. ¦¬R'W. &}. ¦¬R.W'&}

c. Discuss the relevance between R and W. Are they both caused by the same
weather systems? Does a warm day cause rain? Does rain cool down the
temperature?

MS&E 252 Handout #7
Decision Analysis I October 14
th
. 2004

Page 8 oI 8 HW #3
d. Fill in the probabilities on a tree with R and ¬R on the Iirst set oI branches and
with W and ¬W on the second set. Flip the tree and note the resultant
probabilities that this assessment produces Ior W and ¬W. Adiust the conditional
probabilities until you are happy with your overall assessment. Note that Ilipping
the tree can serve as a check on your initial assessments. Iterating a Iew times will
usually produce an assessment with which you Ieel comIortable.

4) Suppose you are given a die with 6 sides. marked 1 through 6.

a. For one roll oI the die. list all the possible outcomes. Assign a probability to each
oI the possible outcomes. Express your belieIs in a probability tree.

b. Graph your probability distribution. cumulative probability distribution. and
excess probability distribution over the outcomes.


Food for thought (Optional to turn in on class web page)

1) Think about an important decision that you will need to make in the near Iuture. Your
decision situation Irom the previous assignment may be used.

a. Create two useIul distinctions that will help you think about the decision.
b. For each distinction. say whether it is observable.
c. Subiect one oI these distinctions to the clarity test. What are the degrees?

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