DECISION ANALYSIS 

This equation is used to solve a  two (2) state of nature decision analysis problem with probability estimates for each form of nature. This is also known as "Expected Value Approach" with varying decisions. A solution is arrived only when there are available options.

ELEMENTS FOR DECISION

State of Nature (S): These are the outcomes of any cause of action which rely on certain factors beyond the control of the decision maker.

Cause of Action (D): A decision made among a set of defined alternative causes of action.

Uncertainty (P): The chances that an event will occur is indicated in terms of probabilities assigned to that event.

Pay Off: This measures the net benefit to the decision maker from a combination of courses of action taken. 

The Expected Value Approach can be used to identify the best decision alternative for investment. It is used in Statistics and  probability analysis.

EXAMPLE

Given the Following

                   S1      S2

D1          200        -20                       Find the Expected Value = Ev(d)=(0.3 X 200) + (0.7 X -20) = 46

D2          150        20                                                                   Ev(d)=(0.3 X 150) + (0.7 X 20) = 59

D3           100       60                                                                   Ev(d)=(0.3 X 100) + (0.7 X 60) = 72

P(Sj)       0.3        0.7

D3 is the best alternative because it has the highest expected value

REFERENCES

Gichuhi, K J & Ndung'u, N D (2013) Quantitative Methods for Business Management : Decision Analysis and Trees. Nairobi : Finesse.

Investopedia (2015) Expected Value. Retrieved on 23rd March 2015 From : http://www.investopedia.com/terms/e/expected-value.asp