As explained in this week’s resources, maximization of expected utility involves the following five steps of decision making:
- Identifying future conditions, along with the likelihood of the condition being realized
- Listing possible alternatives
- Estimating the payoff or utility for each alternative under each future condition
- Calculating the expected utility
- Selecting the best alternative
Decision trees can be used to illustrate all of this information in a graphic manner.
In this Assignment, apply the information from this week’s resources to solve decision problems and complete a Decision Analysis for those problems. Solve problems 5, 10, and 11 on pp. 231–234 of the Stevenson text by creating decision trees, determining expected utilities of the decision alternatives, and offering recommended decisions based on the decision tree analysis.