Multi-objective Decision Analysis

Key Points

• When the decision involves uncertainty and the decision maker is risk neutral, it is possible to use expected value to rank the alternatives. To calculate the expected value of an alternative with uncertain outcomes, compute the expected value of each single-dimensional value function, multiply each expected value by the corresponding preference weight, and sum the products, as shown in Equation 6.1.

• Using expected value as the decision criterion makes sense when the decision maker is risk neutral. However, when the decision maker is risk averse, other decision criteria, such as expected utility or certainty equivalents, are necessary because they account for the decision maker’s conservative attitude toward risk. These expected ...