Imagine your lecture for this course has been rescheduled for 8:00 AM tomorrow morning at UNSW. Regardless of whether you plan to walk, drive, cycle, or catch public transport, you'll need to make a few decisions along the way. These might include the particular route you will take or the time you plan to arrive at the bus stop. In all of these cases, you'll have more than one possible choice but the consequences of each alternative may be different. One route might be longer or experience heavier traffic than an alternative route. Maybe you know with a high degree of confidence that Cleveland Street will be banked up with traffic at that time in the morning. An alternative route might be less predictable, but on the occasions that it is bad, it's very bad indeed. If you want to make it to the class on time, which of course you should do, you'll need to make a decision. To make this decision, you'll need to identify all the alternative courses of action. Then you can consider the consequences of each alternative. And those consequences may depend on information that you can't precisely predict, such as the traffic flow on a particular street at a particular time. We refer to this information as possible states of nature. Once we've considered the courses of action and their consequences according to various possible states of nature. We can start to compare alternatives and evaluate each of our alternative courses of action on the basis of some suitable criterion. In this case, that criterion might be total travel time or the predicted arrival time at UNSW. The way I've described this decision making process is a form of what's known as decision analysis. Decision analysis is a tool which can be applied to much more complex decision problems. If properly applied, it should lead to three important outcomes. Firstly, it structures the problem which otherwise appears very confusing to people due to the complexities introduced by uncertainty. Secondly, it defines optimal choices for any period based on a joint consideration of the probabilities and the nature of any outcome of a choice, specifically by calculation of an expected value.

And then thirdly, it defines an optimal strategy over many periods. Before this class, write down an example of a decision you might need to make at least once this year. See if you can come up with a short list of alternative courses of action and possible states of nature, things that may influence the outcome of each course of action in ways that are beyond your control. It could be a serious, complex decision, or it could be something very trivial. It doesn't matter. Then try to write a short description of the outcomes for each combination of courses of action and states of nature. Is there a clear choice to make with your decision? If not, what additional information do you think you would need to make an informed decision? I'll ask a few students to give their examples at the start of the class. I'll see you there. Oh, and try not to be late.