Many decision analysis problems can be viewed as having three variables: decision alternatives, states of nature, and payoffs. •Decision alternatives are the various choices or options available to the decision maker in any given problem situation. On most days, financial managers face the choices of whether to invest in blue chip stocks, bonds, commodities, certificates of deposit, money markets, annuities, and other investments. Construction decision makers must decide whether to concentrate on one building job today, spread out workers and equipment to several jobs, or not work today.
In virtually every possible business scenario, decision alternatives are available. A good decision maker identifies many options and effectively evaluates them. •States of nature are the occurrences of nature that can happen after a decision is made that can affect the outcome of the decision and over which the decision maker has little or no control. These states of nature can be literally natural atmospheric and climatic conditions or they can be such things as the business climate, the political climate, the worker climate, or the condition of the marketplace, among many others.
The financial investor faces such states of nature as the prime interest rate, the condition of the stock market, the international monetary exchange rate, and so on. A construction company is faced with such states of nature as the weather, wildcat strikes, equipment failure, absenteeism, and supplier inability to deliver on time. States of nature are usually difficult to predict but are important to identify in the decision-making process. •The payoffs of a decision analysis problem are the benefits or rewards that result from selecting a particular decision alternative.
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Payoffs are usually given in terms of dollars. In the financial investment industry, for example, the payoffs can be small, modest, or large, or the investment can result in a loss. Most business decisions involve taking some chances with personal or company money in one form or another. Because for-profit businesses are looking for a return on the dollars invested, the payoffs are extremely important for a successful manager. The trick is to determine which decision alternative to take in order to generate the greatest payoff. Suppose a CEO is examining various environmental decision alternatives.
Positive payoffs could include increased market share, attracting and retaining quality employees, consumer appreciation, and governmental support. Negative payoffs might take the form of fines and penalties, lost market share, and lawsuit judgments. The concepts of decision alternatives, states of nature, and payoffs can be examined jointly by using a decision table, or payoff table. The most elementary of the decision-making scenarios is decision making under certainty. In making decisions under certainty, the states of nature are known. Reference link: http://classof1. com/homework-help/statistics-homework-help
