This calculator contains various models for decision-making as informed by the Decision Theory's Certainty, Uncertainty and Risk criteria. The calculator's models help to advice on the best alternative to choose from among a number of alternatives based on possible monetary consequences of each alternative. This is a simple yet exceedingly effective tool for managerial decision-making especially where consequences can not be determined with certainty.
EXAMPLE
You are presented with three investment alternatives ie. Bonds, Stocks, and CDs. In addition you are informed of how they perform when the economy is on solid growth, on stagnation, and on inflation. I.e. Bonds: 12%, 6%, 3%; Stocks: 15%, 3%, -2%; CDs: 6.5%, 6.5%, 6.5% respectively.
a) Given the probabilities of bonds and stocks are 0.5 and 0.3 respectively. What investment alternative will you advice if you are to use the expected monetary value approach?
b) What investment alternative will you go for if you are to use the following approaches:
The calculator above can be used to answer all these questions. All you need is to feed the values provided above into their respective entries in the calculator.
In the first question (a), you will click on the "Under Risk" button on the calculator to determine the expected monetary value. From the information provided above, it is apparent that this will be a 3x3 matrix i.e. three alternatives (Bonds, Stocks, CDs) and three conditions (Solid growth, Stagnation, Inflation)