CHAPTER 8
DECISION ANALYSIS
SOLUTIONS TO DISCUSSION QUESTIONS
8-1. The purpose of this question is to make students use a personal experience to distinguish between
good and bad decisions. A good decision is based on logic and all of the available information. A bad
8-2. The decision-making process includes the following steps: (1) define the problem, (2) list the
8-3. An alternative is a course of action over which we have complete control. A state of nature is an
8-4. The basic differences between decision-making models under certainty, risk, and uncertainty
depend on the amount of chance or risk that is involved in the decision. A decision-making model
8-5. EMV is the expected monetary value. This is the expected return that we would realize if the
decision were repeated an infinite number of times. EVwPI is the expected value with perfect
8-6. A decision tree is preferred to a decision table when a number of sequential decisions are to be
made. A sequential decision situation is one in which the outcome of one decision becomes an
8-8. The purpose of Bayesian analysis is to determine posterior probabilities based on prior
probabilities and new information. Bayesian analysis can be used in the decision-making process
8-9. The overall purpose of utility theory is to incorporate a decision maker’s preference for risk in
the decision-making process.
8-10. A utility function can be assessed in a number of different ways. A common way is to use a
standard gamble. With a standard gamble, the best outcome is assigned a utility of 1, and the worst
outcome is assigned a utility of 0. Then, intermediate outcomes are selected and the decision maker is
8-11. When a utility curve is to be used in the decision-making process, utility values from the utility
8-12. A risk seeker is a decision maker who enjoys and seeks out risk. A risk avoider is a decision