ABSTRACT
Decisions are often taken chronologically and the strategy that is now adopted will sometimes affect not only the available strategies in future decisions, but also the possible but uncontrollable factors that might influence those future decisions. The described situation is a Sequential Decision-Making problem and the easiest way to account for all possible conditional scenarios and outcomes is by using a graphic representation of the problem known as the Decision Tree. Decision Trees are also frequently used to build Utility functions. These functions model the DM’s behavior towards Risk and their use allow the incorporation of this item in any Decision Theory problem. This chapter is divided into two major parts: Sequential Decision Making and Utility Theory. The first presents how to represent a Sequential Decision-Making problem as a Decision Tree diagram and how it can be used to solve it. The second will introduce Utility Theory, Utility Function and how they relate with DM’s attitude towards Risk. The chapter also proposes a set of exercises covering essentially Sequential Decision Making.
