I n Chapter 4, you studied various rules of probability and used Bayes’ theorem to revise probabilities.

In
Chapter 5, you learned about discrete probability distributions and how to compute the expected value.
In this chapter, these probability rules and probability distributions are applied to a decision-making
process for evaluating alternative courses of action. In this context, you can consider the four basic
features of a decision-making situation: • Alternative courses of action A decision maker must have two
or more possible choices to evaluate prior to selecting one course of action from among the alternative
courses of action. For example, as a manager of a mutual fund in the Using Statistics scenario, you must
decide whether to purchase stock A or stock B. • Events A decision maker must list the events, or states
of the world that can occur and consider the probability of occurrence of each event. To aid in selecting
which stock to purchase in the Using Statistics scenario, an economist for your company has listed four
possible economic conditions and the probability of occurrence of each event in the next year. • Payoffs
In order to evaluate each course of action, a decision maker must associate a value or payoff with the
result of each event. In business applications, this payoff is usually expressed in terms of profits or costs,
although other payoffs, such as units of satisfaction or utility, are sometimes considered. In the Using
Statistics scenario, the payoff is the return on investment. • Decision criteria A decision maker must
determine how to select the best course of action. Section 19.2 discusses five decision criteria: maximax
payoff, maximin payoff, expected monetary value, expected opportunity loss, and return-to-risk ratio