Decision Making Under Uncertainty

These flashcards cover key vocabulary and concepts associated with decision-making under uncertainty, particularly in business contexts.

Conditional Value

The actual profit that results from a given action, conditional on a specified event occurring.

Opportunity Loss

The amount of profit forgone by not choosing the best action for each event.

Conditional Opportunity Loss

The relative loss following a given action, conditional on a specified event occurring.

Expected Monetary Value (EMV)

The expected profit on average given uncertainty, calculated by weighting conditional values by event probabilities.

Expected Opportunity Loss (EOL)

Conditional opportunity losses weighted by event probabilities and summed.

Optimum Act

The action that results in the greatest EMV or smallest EOL.

Expected Profit with Perfect Prediction

The average profit obtainable if each event could be predicted in advance.

Expected Value of Perfect Information

The value obtained from perfect prediction, calculated as Expected profit with perfect prediction minus EMV of the best act.

Decision Nodes

Points in a decision tree where decisions are made.

Event Nodes

Points in a decision tree that represent uncertainties or outcomes.

Expected Value Approach

A decision-making method that evaluates the expected outcomes of different alternatives.

Demand Probability Distribution

The likelihood of various levels of demand occurring for products.

Cost of Additional Information

The expense associated with obtaining more information, which should be less than the potential additional profit.

Formula for Expected Monetary Value (EMV)

EMV(actionj) = \sum{i=1}^{n} CV(actionj, eventi) \cdot P(event_i) where CV is Conditional Value and P is Probability.

Formula for Expected Opportunity Loss (EOL)

EOL(actionj) = \sum{i=1}^{n} COL(actionj, eventi) \cdot P(event_i) where COL is Conditional Opportunity Loss and P is Probability.

Formula for Expected Value of Perfect Information (EVPI)

EVPI = EPPP - EMV{best} where EPPP is Expected Profit with Perfect Prediction and EMV{best} is the Expected Monetary Value of the optimum act.