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- Thesis on Investment Decisions
- Statistics
- Scaling Techniques
- Deber 2
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Concept 1: The Cost of Zero Why We Often Pay too Much When We Pay Nothing

Humans are not risk-adverse, they are loss-averse. When considering a normal purchase, loss-aversion

comes into play. When given a choice between two similar products, one costing money, and one being

offered for free, people forget to consider the downsides of the item that is offered for free. When an item is

offered for free, there is no immediate visibility of loss. The concept of getting something for free makes us

perceive that item that is being offered for free is immensely more valuable than it really is.

According to the “endowment effect,” people who own something begin to value it more than other people

do. The three fundamental quirks of human nature when it comes to ownership are:

> People fall in love with what they already have

> People are loss-adverse and ten to focus on what they might lose, rather than what they might gain.

> People assume that other people will view the transaction from the same perspective as we do.

Because of the “endowment effect,” people also tend to value things they put more work into. One way to

counteract the “endowment effect” is to try to view all transactions as a non-owner.

2) Why, for important decisions, is it advisable to always have more than one alternative from which to

choose?

3) Briefly describe the meaning of each of the four levels of measurement (nominal, ordinal, interval, and

ratio) and their relationship to one another, as well as limitations for their use in mathematical operations.

Nominal Measurement- This is the lowest level in terms of measurement. Nominal data are numerical

representations for names. Nominal information is used for identification purposes only and implies nothing

about the ordering. Examples of nominal figures are phone numbers and social security numbers. You

cannot perform mathematical operations on this data.

Ordinal Measurement- This is the third highest level of measurement. Ordinal measurement implies an

order or ranking among elements. The order can be either increasing or decreasing depending on the

application. An example of ordinal measurement: The Dodgers baseball team being ranked number 1 in the

National League West, and the Giant’s being ranked last (5th place) in the National League West. We

cannot add or multiply ordinal data because the rankings only take into account ordering among the

elements and nothing more.

Interval Measurement- This is the second highest level of measurement. Interval scale data possesses

the meaning of nominal and ordinal data, however, it also has meaning about the interval between objects.

Intervals on different parts of an interval scale have the same meaning. Interval data can be used in

mathematical operations such as addition and multiplication. However, you cannot infer that a total of 10 is

twice as good as a total of 5, you cannot multiply interval level number by another interval level number.

Ratio Measurement- This is the highest level of measurement. Ratio data possesses the meaning of

nominal, ordinal, and interval properties, in addition to the property of ratios. Corresponding rations on

different parts of the ratio scale have the same meaning. In ratio scale measurement equivalent ratios are

considered equal. There are no mathematical restrictions when using ratio level data.

4) Why is a hierarchy of objectives superior to a linear list such as is typical in columns of a spreadsheet for

methods such as weights and scores. A hierarchy of objectives allows a decision maker to keep track of

what is most important to them. It organizes the objectives into different levels of a hierarchy tree which

allow the decision maker remain focused on the objectives.

5) Explain how ratio scale priorities can be derived for qualitative objectives.

6) In your own words, describe and give examples of absolute measurement and relative measurement.

What is the primary advantage of relative measurement?

Absolute measurement refers to something that you can measure with known amounts such as standard

units.

Examples of absolute measurement:

Standing on a scale to measure body weight

Measuring out 1 cup of flour for a cake recipe

A police officer using a radar gun to measure how many miles per hour you are driving

Relative measurement refers to the act of measuring something compared to another thing or estimating

things proportionally to one another.

Examples of relative measurement:

Knowing that store A is a further distance than store B.

Knowing that the sun is closer than the other stars in the sky

Knowing that apples and oranges are about the same size.

The primary advantage of relative advantage of relative measurement is the fact that it allows one to take

into account intuition and qualitative factors.

7) Discuss the importance of iteration when making important decisions. What should you consider when

iterating because the model results do not agree with one or more people's intuition? Iteration is necessary

when making important decisions because you will find that both your model and intuition may change

during the experiment. Iteration allows the decision maker to develop an understanding of tradeoffs among

objectives and an understanding of the implicit and explicit objectives of the experiment. Iteration also

allows the decision maker to gather additional information to father clarify objectives, and alternatives.

Intuition is important in the decision-making process because it keeps in account qualitative aspects of the

problem.

The nature of relative measurement shows how people tend to compare things with one another, things

that are easy to compare when thinking fast. People tend to avoid comparing things that cannot be

compared easily. It is easy to compare an apple and an orange because 1) both items are fruit, 2) both

items are similar in size.

9) State the three original axioms of AHP and comment on the reasonableness and implications of each. In

addition, we naturally use absolute measurement to gauge alternatives against an established scale such

as weight. We can also use absolute measurement to compare the apple against the orange in terms of

weight.

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