14. Statistical Techniques in Business & Economics (19)

19 ­ © 2004 by The McGraw­Hill Companies, Inc. All rights reserved. 19 ­ 2 When you have completed this chapter, you will be able to: Define the terms state of nature, event, decision . alternatives, payoff, and utility Organize information in a payoff table or a decision tree Compute opportunity loss and utility function. Find an optimal decision alternative based on a given . decision criterion. Assess the expected value of additional informationCopyright © 2004 by The McGraw­Hill Companies, Inc. All rights reserved. Terminology. 19 ­ 3. Classical Statistics focuses on estimating a parameter, . such as the population mean, . constructing confidence intervals, . or hypothesis testing. Statistical (Bayesian statistics) is concerned with . Decision Theory determining which decision, from a set of . possible decisions, is optimal. .Copyright © 2004 by The McGraw­Hill Companies, Inc. All rights reserved. 19 ­ 4. E lements of a Decision. Available choices. Available choices. . There are possible alternatives or acts. There are . three . three . States of Nature. States of Nature. components . components . to any . to any these are future events that are not . decision­. decision­ under the control of the decision maker. making . making . situation:. situation: Payoffs. Payoffs. numerical gain to the decision maker . for each combination of . decision alternative and state of natureCopyright © 2004 by The McGraw­Hill Companies, Inc. All rights reserved. Terminology. 19 ­ 5. Payoff Table. Payoff Table. is a listing of all possible combinations of decision . alternatives and states of nature. Expected Payoff or. Expected Payoff . or . Expected Monetary Value . Expected Monetary Value . (EMV). (EMV). is the Expected Value for each decisionCopyright © 2004 by The McGraw­Hill Companies, Inc. All rights reserved. A business example. A business example. 19 ­ 6. Nortel is considering introducing a new wireless . Nortel is considering intr