A decision maker faced with four decision alternatives and four states of nature develops the following profit payoff table.
Decision Alternative | States of Nature
--------------------- | ----------------
d1 | 15 10 11 6
d2 | 12 11 9 8
d3 | 10 11 11 12
d4 | 9 11 12 14
The decision maker obtains information that enables the following probability assessments:
P(s1) = 0.5, P(s2) = 0.2, P(s3) = 0.2, and P(s4) = 0.1.
(a)
Use the expected value approach to determine the optimal decision.
EV(d1) EV(d2) EV(d3) EV(d4)
The optimal decision is d1 d2 d3 d4.
(b)
Now assume that the entries in the payoff table are costs. Use the expected value approach to determine the optimal decision.
The optimal decision is d1 d2 d3 d4.