PROBABILITY THEORY IN DECISION MAKING

a. States of Nature/Expected Payoffs

High Sales (3000x.2) = 600

Medium Sales (2000x.5) = 1,000

Low Sales (-6000x.3) = -1,800

Expected Payoff = - 200

Expected payoff for A2: 0

Recommended decision: Probability analysis indicates that the risks of uncertainty associated with the proposed venture outweigh the potential gains associate with the venture. In the expected payoff assessment for A2 presented above, the assumption is that no costs are associated with not proceeding with the proposed venture. The recommendation, therefore, is to shelve the proposed venture until (a) sales projections improve, (b) profitability projections improve, and (c) some combination of the two occur that will result in a positive expected payoff.

Assuming that a potential venture is being cons

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Approximate Pages = 2 (250 words per page)

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