DECISION ANALYSIS

A decision-making situation includes several components—the decisions themselves and the actual events that may occur in the future, known as

With this criterion, the decision-maker selects the decision that will result in maximum

payoffs. (In fact, this is how this criterion derives its name—a maximum of a maximum.)

This criterion is very optimistic. The decision-maker assumes that the most favorable state of nature for each decision alternative will occur. Thus, using this criterion, the investor would optimistically assume that good economic conditions will prevail in the future.

In contrast with the maximax criterion, which is very optimistic, this criterion is pessimistic. With this criterion, the decision-maker selects the decision to reflect the maximum of the minimum payoffs. For each decision alternative, the decision-maker assumes that the minimum payoff will occur.

With this decision criterion, the decision-maker attempts to avoid regret by selecting

the decision alternative that minimizes the maximum regret.

It strikes a compromise between the maximax and maximin criteria. This decision criterion's principle is that the decision-maker is neither totally optimistic (as the maximax criterion assumes) nor totally pessimistic (as the maximin criterion assumes).

With the Hurwicz criterion, the decision payoffs are weighted by a (?), a measure of the decision-

maker ’s optimism.

A decision criterion closely related to expected value is

It is a graphical diagram consisting of nodes and branches. Using this, the user computes the expected value of each outcome and makes a decision based on these expected values.