DECISION ANALYSIS- MODULE 2 AND 3

Ques1. Decision tree?

Ans 1. A decision tree provides a graphical representation of the decision-

making process. A graphical representation of the decision problem that shows
the sequential nature of the decision-making process. Decision theory problems
are characterized by the following:

1. A list of alternatives.
2. A list of possible future states of nature.
3. Payoffs associated with each alternative/state of nature
combination.
4. An assessment of the degree of certainty of possible future events.
5. A decision criterion.

• Expected Monetary Value (EMV) approach- Provides the decision

maker with a value that represents an average payoff for each alternative.
The best alternative is, then, the one that has the highest expected
monetary value. The average or expected payoff of each alternative is a
weighted average: the state of nature probabilities is used to weight the
respective payoffs.
• Expected Opportunity Loss (EOL)- The opportunity losses for each
alternative are weighted by the probabilities of their respective states of
nature to compute a long-run average opportunity loss, and the alternative
with the smallest expected loss is selected as the best choice.
• Expected Value of Perfect Information (EVPI)- A measure of the
difference between the certain payoff that could be realized under a
condition of certainty and the expected payoff under a condition
involving risk. The expected value of information that would tell the
decision maker exactly which state of nature is going to occur (i.e.,
perfect information).
• Consequence- The result obtained when a decision alternative is chosen
and a chance event occurs. A measure of the consequence is often called
a payoff.
 • Payoff- A measure of the consequence of a decision such as profit, cost,
or time. Each com- bination of a decision alternative and a state of nature
has an associated payoff, (consequence).
• Payoff table- A tabular representation of the payoffs for a decision
problem.
• Minimax regret approach- An approach to choosing a decision
alternative without using probabilities. For each alternative, the maximum
regret is computed, which leads to choosing the decision alternative that
minimizes the maximum regret.
• Opportunity loss, or regret- The amount of loss (lower profit or higher
cost) from not making the best decision for each state of nature.
• Decision criteria- principles, guidelines or requirements that are used to
make a decision. This can include detailed specifications and scoring
systems such as a decision matrix. Alternatively, a decision criterion can
be a rule of thumb designed for flexibility.

Ques 3. Influence diagram?

Ans3. A graphical device that shows the relationship among decisions, chance
events, and consequences for a decision problem. designed to summarize the
dependencies that are seen to exist among events and acts within a decision.

The advantage of starting with influence diagrams is that their graphic

representation is more appealing to the intuition of decision makers who may be
unfamiliar with decision technologies.

• Geometric representation of decision elements:

– Rectangles: represent decisions
– Ovals: represent chance events
– Diamonds: represent payoffs
– Round-cornered rectangles: represent intermediate consequences
or mathematical calculations
• Geometric shapes are called nodes
– Rectangles: decision nodes
– Ovals: chance nodes
– Diamonds: payoff nodes
– Round-cornered rectangles: consequence or calculation nodes
• Nodes connected by arcs to represent relationships
 • Nodes are named
– Predecessor: if at beginning of arc
– Successor: if at termination of arc

• Basic influence diagrams

– Basic risky decision: One decision and one uncertainty

– Imperfect information: Imperfect information about an uncertainty

influences payoff

– Sequential decision: Result from one decision determines if

another decision is to be made

– Intermediate calculation: Compiles predecessors’ information

Ques 4. Bayesian network?

Ans 4. A Bayesian network (BN) is a probabilistic graphical model for
representing knowledge about an uncertain domain where each node
corresponds to a random variable and each edge represents the conditional
probability for the corresponding random variables.
• Bayesian networks aim to model conditional dependence, and therefore
causation, by representing conditional dependence by edges in a directed
graph

• A Bayesian network is a directed acyclic graph in which each edge

corresponds to a conditional dependency, and each node corresponds to a
unique random variable. Formally, if an edge (A, B) exists in the graph
connecting random variables A and B, it means that P(B|A) is a factor in
the joint probability distribution, so we must know P(B|A) for all values of
B and A in order to conduct inference.

Ques 5. Game theory?

Ans 5. Game theory is a mathematical theory that deals with the general
features of competitive situations like these in a formal, abstract way. It
places particular emphasis on the decision-making processes.
• Game theory is a decision theory in where one’s choice of action is
determined after considering all possible alternatives available to an
opponent playing in a same field.
•  Saddle point- A “saddle point” in a two-person constant-sum game is the
outcome that rational players would choose. (Its name derives from its
being the minimum of a row that is also the maximum of a column in a
payoff matrix
• Dominance rule- The principle of dominance states that if one strategy of
a player dominates over the other strategy in all conditions then the later
strategy can be ignored. A strategy dominates over the other only if it is
preferable over other in all conditions.