In order to make the best decision, with the information available , the decision maker utilizes certain decision strategies to evaluate the possible benefits and losses of each alternative . When making a decision in the face of uncertainty, ask: 1) What are my possible Alternatives or Courses of Action ? 2) How can the future affect each action? What are my possible Alternatives or Courses of Action ? Before selecting a course of action, the decision maker must have at least two possible alternatives to evaluate before making his choice. Example : I want to invest $1 million for 1 year. I narrow my choices to three alternatives (actions): Alternative 1 : Invest in guaranteed e certificate paying 10%. Alternative 2 : Invest in a bond with a coupon value of 8%. Alternative 3 : Invest in a well-diversified portfolio of stocks. The Alternatives (Actions) are under the decision maker ’ s control. How can the future affect each alternative (action)? Unless you ’ ve got a crystal ball Future uncertainties may derail the most perfect of plans. These future events are also referred to as States of Nature Example : Economic conditions, foremost among which is interest rates. Interest rates increase. Interest rates stay the same. Interest rates decrease. To account for future uncertainties (events) We assign probabilities to measure the likelihood of a future event occurring.
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