A course of action or a strategy that may be chosen by a decision maker.

A number from 0 to 1. When the coefficient is close to 1, the decision criterion is optimistic. When the coefficient is close to 0, the decision criterion is pessimistic.

A posterior probability.

A consequence, normally expressed in a monetary value, that occurs as a result of a particular alternative and state of nature.

A decision-making criterion that uses a weighted average of the best and worst possible payoffs for each alternative.

A decision-making environment in which the future outcomes or states of nature are known.

A decision-making environment in which several outcomes or states of nature may occur as a result of a decision or alternative. The probabilities of the outcomes or states of nature are known.

A decision-making environment in which several outcomes or states of nature may occur. The probabilities of these outcomes, however, are not known.

In a decision tree, this is a point where the best of the available alternatives is chosen. The branches represent the alternatives.

A payoff table.

An analytic and systematic approach to decision making.

A graphical representation of a decision-making situation.

A measure of how good the sample information is relative to perfect information.

A decision criterion that places an equal weight on all states of nature.

The average value of a decision if it can be repeated many times. This is determined by multiplying the monetary values by their respective probabilities. The results are then added to arrive at the EMV.

The average or expected value of information if it were completely accurate. The increase in EMV that results from having perfect information.

The increase in EMV that results from having sample or imperfect information.

The average or expected value of a decision if perfect knowledge of the future is available.

The criterion of realism.

The equally likely criterion.

An optimistic decision-making criterion. This selects the alternative with the highest possible return.

A pessimistic decision-making criterion. This alternative maximizes the minimum payoff. It selects the alternative with the best of the worst possible payoffs.

A criterion that minimizes the maximum opportunity loss.

The amount you would lose by not picking the best alternative. For any state of nature, this is the difference between the consequences of any alternative and the best possible alternative.

The maximax criterion.

A table that lists the alternatives, states of nature, and payoffs in a decision-making situation.

A conditional probability of a state of nature that has been adjusted based on sample information. This is found using Bayes’ Theorem.

The initial probability of a state of nature before sample information is used with Bayes’ Theorem to obtain the posterior probability.

Opportunity loss.

A person who avoids risk. On the utility curve, as the monetary value increases, the utility increases at a decreasing rate. This decision maker gets less utility for a greater risk and higher potential returns.

A person who seeks risk. On the utility curve, as the monetary value increases, the utility increases at an increasing rate. This decision maker gets more utility for a greater risk and higher potential returns.

Decisions in which the outcome of one decision influences other decisions.

The process used to determine utility values.

An outcome or occurrence over which the decision maker has little or no control.

In a decision tree, a point where the EMV is computed. The branches coming from this node represent states of nature.

The overall value or worth of a particular outcome.

The process of determining the utility of various outcomes. This is normally done using a standard gamble between any outcome for sure and a gamble between the worst and best outcomes.

A graph or curve that reveals the relationship between utility and monetary values. When this curve has been constructed, utility values from the curve can be used in the decision-making process.

A theory that allows decision makers to incorporate their risk preference and other factors into the decision-making process.

Another name for the criterion of realism.