An Excel TUTORIAL for Introductory Statistics Applications

Decision analytics is used to develop an optimal strategy.

• When a decision maker is faced with several decision alternatives and an uncertain or risk-filled pattern of future events.
• Always includes a careful consideration of risk

Risk analysis helps provide the profitability information about the favorable as well as the unfavorable outcomes that may occur. Topics include payoff tables, decision trees, sensitivity analysis, and the use of Bayes’ theorem.

Problem formulation is the first step in the decision analysis process

• Create a verbal statement of the problem.
• Identify the decision alternatives such as uncertain future events, and the outcomes associated with each alternative and the probability of that event outcome

The possible outcomes for each chance event are known as states of nature. States of nature are mutually exclusive (no more than one can occur) and collectively exhaustive (at least one must occur)

Subsection: Payoff Tables

Payoff is the outcome resulting from a specific combination of a decision alternative and a state of nature. Payoff table is a table showing payoffs for all combinations of decision alternatives and states of nature.

Subsection: Decision Trees

Decision Tree: provides a graphical representation of the decision making process

Decision Trees consist of nodes which are used to represent decisions and chance events. Consist of branches that connect the nodes; those leaving the decision node correspond to the decision alternatives. The branches leaving each chance node correspond to the states of nature. The outcomes (payoffs) are shown at the end of the states-of-nature branches. Example to be added