Reference no: EM132299297

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1) Bounded Rationality derives from the fact that businesses and consumers do not have enough full information to make a well informed decision. It's the idea that the cognitive decision making capacity of humans cannot be fully rational because of a number of limits that we face. For instance the complexity of products often makes choices difficult. Bounded rationality is attempting to make a decision as rational as possible based on the information they have.

2) Sub-optimization is a practice of focusing on one component of a total and making changes intended to improve that one component but ignores the effects on the other components. This creates a situation where a process, procedure, or system yields less than the best possible outcome or output, caused by a lack of best possible coordination, elements, or parts.

3) Expected value of perfect information is the difference between the payoff under certainty and the payoff under risk. It places an upper bound on what one would pay for additional information. EVPI is the maximum you should pay to learn the future. EVPI = Expected value with perfect information minus maximum EMV.

4) The Minimax regret approach to decision making is a strategy that minimizes the maximum regret and is used by decision makers who are risk averse. It is the minimization of regret when one decision has been made instead of another that causes the expected payoff of an event to be less than expected. It is also referred to as opportunity loss.