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Answer StepExercise Min EOL

This document provides step-by-step instructions for using the minimum expected opportunity loss (EOL) approach to make a decision under risk. It includes a sample payoff table and calculations to construct an opportunity loss table, calculate the expected opportunity loss for each alternative, and select the alternative with the minimum expected opportunity loss. The best decision according to this approach is alternative 2, which has an expected opportunity loss of 25. Comparing to expected monetary value and expected value of perfect information, the document states that the minimum EOL approach selects the same alternative as the maximum expected monetary value approach, but minimum EOL does not equal expected value of perfect information.

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Kamal Saravanan
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867 views2 pages

Answer StepExercise Min EOL

This document provides step-by-step instructions for using the minimum expected opportunity loss (EOL) approach to make a decision under risk. It includes a sample payoff table and calculations to construct an opportunity loss table, calculate the expected opportunity loss for each alternative, and select the alternative with the minimum expected opportunity loss. The best decision according to this approach is alternative 2, which has an expected opportunity loss of 25. Comparing to expected monetary value and expected value of perfect information, the document states that the minimum EOL approach selects the same alternative as the maximum expected monetary value approach, but minimum EOL does not equal expected value of perfect information.

Uploaded by

Kamal Saravanan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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Step-by-Step Exercises on Decision Making under Risk

- Minimum EOL Approach BSNS2120, J. Wang


Name __J. Wang_______
A payoff table is given as below.
States of Nature
A
B
C
Alternatives P(A)=0.7 P(B)=0.1 P(C)=0.2
1
120
-100
60
2
90
100
70
3
80
100
80
4
-50
80
90
Col. Max
120
100
90
Part 1. Select the best decision by using the Minimum EOL Approach.
(EOL = Expected Opportunity Loss)
Do the three steps below (Show your calculations):
Step 1.
Construct the opportunity loss table.
(a) Calculate the maximum payoff of each column (each state of nature); Put you result
into the table above.
(b) Calculate the opportunity loss of each cell below.
Example: Opportunity loss for cell A2
= maximum payoff in column A payoff in cell A2.
Opportunity loss for cell C3
= maximum payoff in column C payoff in cell C3.
The opportunity loss table (Regret table).
States of Nature
A
B
C
Alternatives P(A)=0.7 P(B)=0.1 P(C)=0.2
1
0
200
30
2
30
0
20
3
40
0
10
4
170
20
0
Is the following statement true or false?
Opportunity losses can never be negative.
a. True
b. False

Step 2.
Calculate the expected opportunity loss for each alternative.
EOL(Alt. 1) = 0*0.7 + 200*0.1 + 30*0.2 = 26;
EOL(Alt. 2) = 30*0.7 + 0*0.1 + 20*0.2 = 25;
EOL(Alt. 3) = 40*0.7 + 0*0.1 + 10*0.2 = 30;
EOL(Alt. 4) = 170*0.7 + 20*0.1 + 0*0.2 = 121.
Step 3.
Pick up the alternative with Minimum EOL, which is Alt. 2 , with EOL= 25.
Part 2.
Calculations in Part 1 can be put in the extended opportunity loss table.
(1) Put your results in Part 1 into the extended opportunity loss table below.
Extended opportunity losses (regrets) table:
States of Nature
A
B
C
Alternatives P(A)=0.7 P(B)=0.1 P(C)=0.2
1
0
200
30
2
30
0
20
3
40
0
10
4
170
20
0

Expected Opportunity
Loss
(EOL)
0*0.7 + 200*0.1 + 30*0.2 = 26
30*0.7 + 0*0.1 + 20*0.2 = 25
40*0.7 + 0*0.1 + 10*0.2 = 30
170*0.7 + 20*0.1 +0*0.2 = 121

(2) Circle and label the best decision and its EOL in the table.
Part 3.
Compare the result we have here to those we had in Exercise on EMV and EVPI.
1. The decision from the Minimum EOL Approach is the same as the decision from
the Maximum EMV Approach is.
a. True
b. False
2. Minimum EOL = EVPI.
a. True

b. False

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