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**Decision Analysis I October 28
**

th

. 2004

Page 1 oI 9 HW #4

Homework Assignment #4

Due on Thursday November 4

th

. 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. ~The Foundation of Decision Analysis¨: Iinish reading chapters 2 and 3.

Distinctions

From the class lectures. explain the Iollowing concepts:

• Prospect

• Deal

• Prior

• Likelihood

• Posterior

• Pre-posterior

• PreIerence Probability

• Five Rules oI Actional Thought:

• The probability rule

• The order rule

• The equivalence rule

• The substitution rule

• The choice rule

• Money pump

• e-value

• u-value

Probabilistic questions

1) Suppose you know that there is an urn with 10 balls inside. 5 oI which are red. and 5

oI which are black. You believe each ball is equally likely to be drawn Irom the urn.

Samir takes out one oI the balls at random but does not show you which one. It is now

your turn to draw a ball Irom the urn. What probability should you assign to pulling

out a red ball Irom the urn?

MS&E 252 Handout #13

Decision Analysis I October 28

th

. 2004

Page 2 oI 9 HW #4

a) 1/2

b) 5/9

c) 4/9

d) There is not enough inIormation to decide.

2) Elisa would preIer an Audi A4 to an InIiniti G35. and an InIiniti G35 to a Honda

Accord. She slightly preIers '40° chance Ior an Audi A4 and 60° chance Ior an

InIiniti G35¨ to '90° chance Ior an InIiniti G35 and 10° chance Ior a Honda

Accord¨. However. she preIers '100° chance Ior an InIiniti G35¨ to '30° chance

Ior a Audi A4 and 70° chance Ior a Honda Accord¨

How many oI the Iollowing statements are true?

I. Elisa`s preIerences violate the order rule.

II. Elisa must preIer '100° chance Ior an InIiniti G35¨ to '25° chance Ior a

Audi A4 and 75° chance Ior a Honda Accord¨

III. Next month. Elisa can state that she preIers the InIiniti G35 to the Audi A4

without violating the order rule.

a) 0

b) 1

c) 2

d) 3

3) Silvia needs to have a heart surgery in the next month. How many oI the Iollowing

statements violate any oI the 5 rules oI actional thought?

I. Dr. Kuharic tells Silvia that her chances oI surviving surgery A are between

97° and 99.9°¨.

II. Silvia preIers surgery A to B. surgery A to C and surgery B to C. She learns

that surgery A is no longer available. and so she chooses to have surgery B

instead oI surgery A.

III. Silvia preIers to have surgery A because it costs less than surgery B Ior

roughly the same probability oI success. She preIers surgery B to surgery C.

because even though they cost the same. surgery B has higher chances oI

success. But she preIers surgery C to surgery A because it is much less

painIul.

a) 0

b) 1

c) 2

d) 3

MS&E 252 Handout #13

Decision Analysis I October 28

th

. 2004

Page 3 oI 9 HW #4

4) Consider the Iollowing relevance diagram:

How many oI the Iollowing operations can you perIorm on this relevance diagram

without any further manipulation?

I. Remove the arrow Irom 'Cold` to 'Sneezing`.

II. Add an arrow Irom 'Fever` to 'Outdoor Activities`.

III. Flip the arrow that goes Irom 'Pneumonia` to 'Cough`.

a) 0

b) 1

c) 2

d) 3

5) Based on the same relevance diagram as Question 4. how many oI the Iollowing

statements can you inIer after performing any legal and necessary manipulation?

I. 'Fever` and 'Sneezing` are relevant given &.

II. 'Pneumonia` and 'Sneezing` are irrelevant given 'Outdoor Activities`.

III. 'Pneumonia` and 'Sneezing` are irrelevant given &.

IV. 'Pneumonia` and 'Cold` are irrelevant given 'Outdoor Activities` and

'Fever`.

a) 0

b) 1

c) 2

d) 3 or 4

6) Emily is planning a vacation with her Iriends Juan. Celine. and Ming. Emily is in

charge oI deciding where to go (either Hawaii or Australia) and what activity to do

(scuba diving. snorkeling. or sailing). Her preIerences Ior the various outcomes can

be arranged as Iollows:

Pneumonia

Outdoor

Activities

Cold

Fever Sneezing Cough

MS&E 252 Handout #13

Decision Analysis I October 28

th

. 2004

Page 4 oI 9 HW #4

Location Activity Preference

Probability

Australia Scuba Diving 1.0

Hawaii Snorkeling 0.9

Australia Snorkeling 0.7

Australia Sailing 0.5

Hawaii Sailing 0.4

Hawaii Scuba Diving 0.0

Emily then Iinds out that Juan cannot go scuba diving since he has sinus problems.

Emily decides to recalibrate the table above with the scuba diving options eliminated

(so that 'Hawaii and Snorkeling¨ is the best outcome and 'Hawaii and Sailing¨ is the

worst outcome). What value is closest to Emily`s new preIerence probability Ior the

outcome 'Australia and Snorkeling¨?

a) 0.6

b) 0.7

c) 0.8

d) There is not enough inIormation to decide.

7) Celine also suggests the possibility oI going bungee iumping in either Australia or

Hawaii. Emily`s preIerences Ior the two new outcomes are as Iollows:

How can we characterize Emily`s attitude toward the outcomes 'Australia and

Sailing¨ and 'Australia and Bungee Jumping¨?

a) She preIers 'Australia and Sailing¨.

b) She preIers 'Australia and Bungee Jumping¨.

0.2

Hawaii and Snorkeling

Australia and Bungee Jumping

Hawaii and Sailing

0.8

0.8

Hawaii and Snorkeling

Hawaii and Bungee Jumping

Hawaii and Sailing

0.2

MS&E 252 Handout #13

Decision Analysis I October 28

th

. 2004

Page 5 oI 9 HW #4

c) She is indiIIerent between 'Australia and Sailing¨ and 'Australia and Bungee

Jumping¨.

d) There is not enough inIormation to decide.

8) Jason has the Iollowing certain equivalents Ior these deals:

Assuming that he Iollows the Five Rules oI Actional Thought. what will be his certain

equivalent Ior the Iollowing deal?

a) $50

b) Strictly greater than $50

c) Strictly less than $50

d) There is not enough inIormation to decide.

9) Susan has the preIerence probabilities listed below:

Value |$| PreIerence

Probability

0 0

25 0.3

40 0.5

70 0.8

100 1

Deal A Deal C

0.9 0.6

$100 $100

$75 ~ $30 ~

$0 $0

0.1 0.4

Deal B

0.7

$100

$50 ~

$0

0.3

Deal D

0.2

0.5 $100

0.8

$75

0.4

$30

0.1

$0

MS&E 252 Handout #13

Decision Analysis I October 28

th

. 2004

Page 6 oI 9 HW #4

Susan was given an invitation to a contest where she can win either $70 (the main

prize) or $25 (the consolation prize). Since there will be only two contestants. Susan

will receive one oI those two prizes Ior sure.

What would have to be Susan`s probability oI winning the main prize. Ior her to be

indiIIerent between selling and not selling the invitation Ior $40?

a) Less than or equal to 0.33

b) More than 0.33 but less than or equal to 0.66

c) More than 0.66

d) There is not enough inIormation to answer this question.

10) Gael iust opened a trendy boutique downtown Paris where he sells cut Ilowers that he

buys at a wholesale market. This morning. he Iound some beautiIul roses and bought a

carload oI them Ior $5 apiece. The roses (at a retail price oI $6) were a great success

throughout the day. However. Gael overbought and now. towards the end oI the day.

he still has several vases Iull oI the Ilowers.

Gael believes that iI he maintained the original price oI $6 per rose. he could sell 5°

oI his remaining stock throughout the evening. The roses not sold tonight. could sell

tomorrow Ior $2 apiece. (Cut roses do not stay Iresh very long.) Alternatively. Gael

could lower his price and sell the roses Ior $4 apiece throughout the rest oI the day.

He believes that he could sell tonight 90° oI his remaining stock at this price.

Gael begins making the sign Ior the $4 per rose sale. when his buddy Jerôme. an

MBA student. drops by the store and starts to demonstrate to Gael the error in his

reasoning. Jerôme argues that Gael should not even think oI selling the roses at $4

apiece because his marginal proIit would be less than zero iI he were to do this. Gael

thanks Jerôme Ior his wisdom. and decides to continue selling the roses Ior $6 apiece

Ior the rest oI the day.

Assuming that Gael is indiIIerent between 1$ today and 1$ tomorrow. did he make a

good decision?

a) Gael made a good decision because it does not make sense Ior him to sell the

roses Ior less than what he paid Ior them.

b) Gael made a good decision because there is a chance oI generating higher

proIits iI he maintains the price at $6 per rose.

c) You can`t tell iI Gael made a good decision until it is known how many roses

he ends up selling.

d) None oI the above.

MS&E 252 Handout #13

Decision Analysis I October 28

th

. 2004

Page 7 oI 9 HW #4

Quantitative Problems:

1) Draw the relevance diagram corresponding to the tree below. Then reorder the

distinctions so that they are in the order CAB and draw its corresponding relevance

diagram. Are events A and B relevant to one another? How about C and A?

B

.8

.5

.5

.5

A

A'

B

B'

B'

.5

.2

C

.8

C'

.2

C

.6

C'

.4

C

.4

C'

.6

C

.2

C'

.8

2) Sooiin Iollows the rules oI actional thought. preIers more money to less. and has a

certain equivalent oI $35 Ior a 50-50 chance at $80 or $0. For the Iollowing three

deals. give Sooiin`s preIerence ordering.

$35

$0

.7

.3

Deal B

$80

$0

.4

.6

Deal A

$20

$80

.5

.5

Deal C

.8

.2

$0

3) Carolina has certain equivalents Ior the two deals as Iollows:

.25

.75

$100

$0

$50 ~

$0

.50

.50

$100

$35 ~

Use the substitution rule to determine her certain equivalent Ior the Iollowing deal:

.125

.25

.25

.375

$0

$100

$50

$35

MS&E 252 Handout #13

Decision Analysis I October 28

th

. 2004

Page 8 oI 9 HW #4

4) The risk-neutral Ashish. who preIers more money to less. indicated that he preIerred

deal A to deal B & deal D to deal C.

$5M

$0

.1

.9

Deal D

$1M

$0

.11

.89

Deal C

$0

$1M

.01

.89

Deal B

$5M

.1

$1M

Deal A

a. Was he consistent with all oI the rules oI actional thought? II not. which rule(s)

did he violate and how did he violate them?

b. As a decision expert. how would you have advised him to choose between deals A

& B and deals C & D?

5) In the city oI Cincinnati. there are two taxicab companies. the Blue and the Green. As

you may suppose. the Blue cabs are blue and the Green cabs are green. The Blue

company operates 90° oI all cabs in the city and the Green company operates the

rest. One dark evening. a pedestrian is killed by a hit-and-run taxicab.

There was one witness to the accident. In court. the witness` ability to distinguish cab

colors in the dark is questioned. so he is tested under conditions similar to those in

which the accident occurred. II he is shown a green cab. he says it is green 80° oI

the time and blue 20° oI the time. II he is shown a blue cab. he says it is blue 80° oI

the time and green 20° oI the time.

The iudge believes that the test accurately represents the witness` perIormance at the

time oI the accident. so the probabilities he assign to the events oI the accident agree

with the Irequencies reported by the test.

a. Construct the relevance diagram Ior the iudge`s state oI inIormation.

b. Construct the probability tree representing the iudge`s state oI inIormation. Label

all endpoints. supply all branch probabilities. and calculate and label all endpoint

probabilities.

c. Flip the tree. Label all endpoints. supply all branch probabilities. and calculate

and label all endpoint probabilities.

d. Draw a relevance diagram corresponding to your result in Part (c).

e. II the witness says 'The cab involved in the accident was green.¨ what probability

should the iudge assign to the cab involved in the accident being green?

f. How does the answer to Part (e) compare to the witness` accuracy on the test?

Does this result seem surprising? Why or why not?

MS&E 252 Handout #13

Decision Analysis I October 28

th

. 2004

Page 9 oI 9 HW #4

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

1) When it comes to preparing Ior the possibility oI a maior earthquake. people have

varied widely in what they think their best response should be to the uncertainty it

creates. Some people seem to have thought very clearly about their decisions. which

range Irom "do nothing" to "stockpile water and water treatment devices. canned Iood.

Iuel. Iirst aid materials. etc." Others keep a Iew things on hand. but don't plan

extensively.

a. Think careIully about the distinctions necessary to bring clarity to your own

decision on how to prepare Ior the "big one". or at least some aspect oI that

preparation.

b. Create a relevance diagram oI all the uncertainties. SpeciIy the degrees oI each

distinction and your associated belieIs. Do your distinctions pass the clarity test?

c. Create a decision tree.

d. What is the Value oI Clairvoyance on each individual distinction?

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