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Decision Making Short Cases

The document discusses two scenarios involving decision making under uncertainty. The first scenario is about a man trying to decide whether it is his wedding anniversary and what gift to get for his wife. The second scenario asks whether someone would prefer a lottery with a guaranteed $1000 prize or a 50/50 lottery with a $10000 prize or $5000 loss. The document also includes brief discussions of expected utility theory and utility depending on individual circumstances.

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Vachi Vidyarthi
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27 views1 page

Decision Making Short Cases

The document discusses two scenarios involving decision making under uncertainty. The first scenario is about a man trying to decide whether it is his wedding anniversary and what gift to get for his wife. The second scenario asks whether someone would prefer a lottery with a guaranteed $1000 prize or a 50/50 lottery with a $10000 prize or $5000 loss. The document also includes brief discussions of expected utility theory and utility depending on individual circumstances.

Uploaded by

Vachi Vidyarthi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Decision making under uncertainty

Wedding anniversary?

Julian Sizer is about to leave his office for home. He looks again at his desk calendar. It is March 15.
This, he begins to feel, is an important date for him. Is it his wedding anniversary? He better buy his
wife some flowers (cost $25). But what if it is not their anniversary and he arrives home with the
present? She will become suspicious. He would have to take her out to dinner to explain (cost $125).
Worse still if he does not bring anything home and it is their anniversary there will be trouble;
perhaps $500 would be needed to help patch things up.

What should he do?

Giving the matter some further thought Julian decides that it is in fact unlikely that March 15 is the
date of his anniversary. He estimates the chance that it is, at only 10%.

How would this estimate affect his decision?

In desperation Julian is about to ring his mother-in-law.

What is the expected value of perfect information (EVPI) he is about to obtain?

Utility, risk analysis – Lottery

Which would you prefer?

(i) A lottery which gives you $1000 for certain

or

(ii) A lottery which gives 50:50 chance of $10000 or a loss of $5000?

Note:

"The idea that choices among alternatives involving risk can be explained by the maximization of
expected utility is ancient..."(The utility analysis of choices involving risk, J. Political Economy 56
(1948), 279304, M.Friedman and L.J. Savage).

"...the value of an item must not be based on its price, but rather on the utility it yields. The price
of the item is dependent only on the thing itself... the utility, however, is dependent on the
particular circumstances of the person making the estimate" (Daniel Bernoulli, 1738).

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