Quantitative Analysis for Management, 13/e

3.4 Decision Making Under Risk

Decision making under risk is a decision situation in which several possible states of nature may occur and the probabilities of these states of nature are known. In this section, we consider one of the most popular methods of making decisions under risk: selecting the alternative with the highest expected monetary value (or simply expected value). We also use the probabilities with the opportunity loss table to minimize the expected opportunity loss.

Expected Monetary Value

EMV is the weighted sum of possible payoffs for each alternative.

Given a decision table with conditional values (payoffs) that are monetary values and probability assessments for all states of nature, it is possible to determine the expected ...