Question

(a) Describe the advantage in using a payoff matrix to analyse decisions. Explain the steps required in developing such a matrix.

(b) What advantage do decision trees provide and in what situations are they preferred to a payoff matrix?

Answer 1

a) A payoff matrix is defined as a visual representation of all the possible outcomes that can occur when two people or groups have to make a strategic decision. The decision is referred to as a strategic decision because each decision maker has to take into consideration how their choice will affect their opponent's choice and how their opponent's choice will affect their own choice. The payoff matrix illustrates each possible strategy that one side can choose, as well as every combination of outcomes that are possible based on each opponent's choice. Therefore it is simple to view all these possibilities in a structured and tabular manner in the form of a payoff matrix and then make our correct decisions.

We need to have data regarding how one group's decision will affect the group itself and other groups. We do this for all the groups and put out the data in a tabular form.A example for the same can be a game of rock, paper, scissors played between two people and the payoff matrix will be:

b) Decision trees provide a systematic approach in making decisions as it provides a flowchart of all the decisions to be taken into account. Decision trees are like payoff matrices because they enhance the decision maker's ability to evaluate alternatives by making use of expected values.

But decision trees are preferred to a payoff matrix in situations where there are several decisions to be made in sequence, like after making a particular decision, we have to decide regarding other alternatives after we have made the decision and so on. In such cases, decision trees are preferred.

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