Decision Theory

Exercise

You sign up for a cell phone plan and are presented with this chart showing how your plan
“automatically adjusts” to the minutes you use each month. For example: If you select Option 1
and you use 700 minutes the first month, you’ll only pay $79.99. If your usage then goes down
to 200 minutes the 2nd month, you’ll only pay $29.99. You guess your monthly usage will be
100, 300, 500 or 700 anytime minutes. Assume the probabilities for each event are the same.

a. Create a payoff (cost) table for this decision.

b. Using the expected monetary value principle, which decision would you suggest?
c. Using the optimistic (maximax cost) approach, which decision would you suggest?
d. Using the pessimistic (maximin cost) strategy, which decision would you suggest?
e. Work out an opportunity loss table for this decision.
f. Using the minimax regret strategy, which choice would you suggest?
g. What is the expected value of perfect information?