How to Make a Decision with Bayes Decision Rule

Bayes Decision rule is a easy to use formula to help you make a decision.
For a wide category of problems under conditions of uncertainty, Bayes Decision Rule is a simple way to look at things differently.

Imagine you have three big ideas
and they are all really great ideas with large potential for payoff.
Let’s say you are also short of time and cash.
Lets look at the situation:
A = high cost, high time and huge payout
B= no cost, medium time, large payout
C= low cost, medium time, and medium payout

Lets assign weight to the variables by assigning a simple favorite #1 to the least favorite #3
A = high cost (3), high time (3), and huge payout (1)
B= no cost (1), medium time (2), large payout (2)
C= low cost (2), medium time (2), and medium payout (3)

Now let’s add the numbers for each option.
A = 3+3+1 = 7
B = 1+2+2 = 5
C = 2+2+3 = 7

In this example since we rank ordered with one the best, we will choose option “B” since it has the lowest number.
The results change depending on what is most important to you and how you rank each item.

Here are the basic steps:
1) List the alternatives.
2) List the possible variables like time, cost, money, future event or state.
3) Assign probabilities to the variables.
4) For each alternative determine the net result or payoff.
5) Evaluate each alternative by computing an expected return
6) Select the alternative with the highest expected return based on your weighting of the probabilities of the variables.

See the video for another example.  I will add a few other videos with examples and see about cutting down the time on the first video for you.

I am interested in the ways you make decisions and look forward to reading your comment.



Tagged as: Clay Franklin, Decision Rule