Expected Value Decision Rule Essay

Pages: 2 (679 words)  ·  Bibliography Sources: 2  ·  File: .docx  ·  Level: College Senior  ·  Topic: Business - Management

Judgment in Managerial Decision Making:

In the process of making decisions or choices under risk or uncertainty, managers must usually include the risk into their decision-making process. Notably, the process of making decisions under situations of risk and uncertainty incorporate the use of some basic rules by managers. The situations of risks or uncertainty take place when a manager must make a decision for which the result is not known in a clear or certain manner (Thomas & Maurice, 2008). In this case, the manager can outline all probable outcomes and allocate probabilities to the different outcomes. In situations where a decision maker cannot outline all probable outcomes or allocate probabilities to different outcomes, uncertainty occurs.

One of the most commonly used rules by managers in the decision making process is the expected value rule. Similar to the other decision making rules, managers can use expected value rule to make decisions under risk. The rule acts as a guide for managers in their evaluation of risky decision making. A manager's actual decision when using the expected value rule is largely dependent on the willingness of the manager to take on risk. Generally, the expected value rule can be considered as a means to evaluate the relative value or benefits of decision alternatives.

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The decision making rule involves a mathematical amalgamation of payoffs and probabilities, which are used to calculate expected values. The main aim of carrying out the mathematical calculations in this process is to identify the expected value of every decision alternative arising from the origin node. Once the calculations for each decision alternative have been made, the decision alternative with the highest expected value is considered as the best possible decision or choice. In essence, expected value is regarded as the probability-evaluated average of every possible outcome of a chance event.

Essay on Expected Value Decision Rule Assignment

The calculation of expected value requires the application of certain rules despite the fact that the formal definition of this concept can be applied. One of the most important rules in this process is that the… [END OF PREVIEW] . . . READ MORE

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