DS Test 2

What is the purpose of a decision tree in decision science?

A decision tree graphically represents a decision-making process with multiple alternatives and uncertain outcomes.

What does a square node represent in a decision tree?

A square node represents a decision point where a choice must be made.

What does a circle node represent in a decision tree?

A circle node represents an uncertain event or outcome.

What is the expected value in decision trees?

The expected value is calculated by multiplying each possible outcome by its probability and summing the results.

What is the Value of Perfect Information (VPI)?

VPI is the value added by learning the outcome of an uncertainty before making a decision.

What is the Value of Imperfect Information (VII)?

VII is the value added by learning information that leads to different probabilities for uncertain outcomes.

What is the optimal decision path in a decision tree?

The optimal decision path maximizes the expected value at each decision node.

What rule must probabilities follow in a decision tree?

The probabilities of uncertain events must sum to 1 for each decision alternative.

What is the difference between a decision node and a chance node?

A decision node (square) represents a choice the decision-maker controls, while a chance node (circle) represents an uncertain event with probabilities.

What is the role of an end node in a decision tree?

An end node represents the final outcome of a decision path, including payoffs or consequences.

What is the Expected Monetary Value (EMV)?

EMV is the weighted average of possible payoffs, where each payoff is multiplied by its probability.

What is the Value of an Option?

The Value of an Option is the benefit gained by having the flexibility to delay a decision until more information is available.

When should a company use a decision tree?

A decision tree is useful when evaluating multiple alternatives with uncertain outcomes and when calculating the expected value of different choices.

What is the difference between Value of Perfect Information (VPI) and Value of Imperfect Information (VII)?

• VPI = Knowing the outcome before making a decision.

• VII = Learning partial information that updates probabilities of uncertain events.

What is the Maximin strategy in decision trees?

The Maximin strategy chooses the decision that maximizes the minimum possible payoff (a conservative, risk-averse approach).

What is true about the optimal decision path in a decision tree?

It is the path that maximizes the expected value at each decision node