Risk Profile

Wednesday, September 7, 2022 6:18 AM

Risk analysis helps the decision maker recognize the difference between:

• The expected value of a decision alternative, and

• The payoff that might actually occur

The risk profile for a decision alternative shows the possible payoffs for the decision
alternative along with their associated probabilities.

Large Complex Decision Alternative

Sensitivity Analysis can be used to determine how changes to the following inputs
affect the recommended decision alternative:
• Probabilities for the states of nature
• Values the payoffs
• If a small change in the value of one of the inputs causes a change in the
recommended decision alternative, extra effort and care should be taken in
estimating the input value.

Decision Analysis with Sample Information

• Frequently, decision makers have the preliminary or prior probability assessments for
the states of nature that are the best probability values available at that time
• To make the best possible decision, the decision maker may want to seek additional
information about the states of nature
• This new information, often obtained through sampling, can be used to revise the
prior probabilities so that the final decision is based on more accurate probabilities
for the states of nature.
• These revised probabilities are called posterior probabilities

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