Which of following decision criterion would be used by an optimistic decision maker solving a problem under conditions of uncertainty?

The Criterion of Realism decision rule is an attempt to make a tradeoff between complete risk indifference (as in the Maximax rule), and total risk aversion (as in the Maximin rule). With this procedure, the decision maker will decisde how much emphasis to put on each extreme.

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What decision criterion would be used by an optimistic decision maker?
Which decision criterion is used in decision making under uncertainty?
What is optimistic decision criterion?
What techniques are used to solve decision making problems under uncertainty?

Tod do this, he must choose a Coefficient of Realism, called alpha (α), which is a decimal number between 0 and 1. This number provides the emphais on the optimistic view. The number (1-α), then, is the amount of emphasis that is placed on the most pessimistic outcome. For example, if a manager chose an alpha of 0.6, he would be placing 60% emphasis on a risky, high return (Maximax-type) outcome, and 40% emphasis (since 1-0.6 = 0.4 or 40%) on a low-risk, pessimistic, (Maximin-type) outcome.

Explained another way, the Criterion of Realism calculates a weighted average of the best and worst outcomes for each alternative, using α and (1-α) as the weights, respectively.

To determine the decision under the Criterion of Realism decision rule, a column is added on the right side of the payoff table. In this column the decision maker must calculate the factor by multiplying the best outcome in the row by α, multiplying the worst outcome in the row by (1-α),and adding the two result together.

Note that the sign on the payoffs is important, and frequently the worst payoff in a row will be a negative number. Make sure you add positive and negative numbers correctly!

From these calculated numbers in each row, identify the highest one, and that will be in the row of the decision alternative to be selected under this rule.

In the example above, the manager decided to use an alpha of 0.8, meaning that he wanted to place 80% emphasis on a high-payoff alternative, and so only 20% emphasis on the low-risk alternative. Since the decision alternative Construct a Large Plant has the maximum payoff in the new Criterion of Realism column, it would be selected as the decision to implement.

Do you see how Mr. Thompson got the $124,000 in the Construct a Large Plant row?

He multiplied alpha (0.8) by the best row outcome of 200,000 and got 160,000. He then multiplied (1-α) (1 - 0.8 or 0.2) by the worst outcome in the row, which is -180,000 to get -36,000. 160,000 plus -36,000 gives 124,000.

Now you do it for the Construct a Small Plant row as a check on your knowledge.

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Terms in this set (52)

There are three equally likely states of nature (High, Medium, and Low demand). If the large factory will post profits of $50,000, $25,000, and minus− $10,000 under these states of nature, respectively, what is the EMV of the factory?
A.
$25,000
B.
$21,666.67
C.
$50,000
D.
$28,333.33
E.
$65,000

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Other Quizlet sets

What decision criterion would be used by an optimistic decision maker?

The maximax decision criterion is the one used by the optimistic decision maker. Underlying the maximax philosophy is either of two implicit thoughts .

Which decision criterion is used in decision making under uncertainty?

Maximin Criterion This is a conservative criterion where we are selecting the alternative with the best worst case outcome. For the decision in Figure 1 we have the following worst case outcomes. Using Maximin, we should select alternative 1 since it has the best worst case outcome.

What is optimistic decision criterion?

maximum of the maximum rewards. • A very optimistic decision criterion. – Decision maker assumes that the most favorable. state of nature for each action will occur.

What techniques are used to solve decision making problems under uncertainty?

Risk analysis is for making decisions under uncertainty and in the face of variability. Risk assessors lack information because there are facts that they do not know, data that they do not have, the future is fundamentally uncertain, and because the universe is inherently variable.