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Chapter 8 Decision Analysis

Chapter 8 Decision Analysis

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Published by: api-25888404 on Nov 06, 2009
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12/03/2012

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1
Chapter 8DecisionAnalysis
MGS3100
Julie Liggett De Jong
TerminologyStates ofnaturePayoffs /payoff tableProbability
 
The
payoff table payoff table 
is a fundamentalcomponent in decision analysismodels
State of Nature1 2
Decision
1
11
12
1m
2
21
22
2m
n
n1
n2
nm
… …
Table 1, p81
TerminologyExpected ReturnRegretEVPIEVSI
 
Three Classes ofDecision Models
Decisions under:certaintyriskuncertainty
Decisionsundercertainty
 
2
If I know for sure that it will be rainingwhen I leave work this afternoon,should I take my umbrella to worktoday?If I know for sure that it will be rainingwhen I leave work this afternoon,should I take my umbrella to worktoday?
RainTake Umbrella0Do Not-7.00
Table 2, p82
Decisions under riskMultiple states of natureWe size up the likelihood of eachstate of nature happening
Historical frequencies
 
3
Historical frequenciesSubjective estimatesWe calculate
Expected Returns Expected Returns 
E(X) =
Σ
p
i
x
i
ER
i*
= maximum overall
of ER
i
We choose the alternative that yields the maximumexpected return. In other words,
i* 
is the optimaldecision wherec)Calculate expected values: expected shortage(S) & expected excess (E) inventory
1.700.18*1=0.180.18*1=0.180.14*3=0.420.18*1=0.180.16*2=0.320.14*3=0.42
Exp(s)
0.240.180.240.240.180.140.180.160.080.14
Prob.
2
E
0.16
Expected
113123
S
42434242434543444045
Demand
.51.58.29.50.55.96.66.80.02.97
RN
1098765430.08*2=0.1621
Exp(E)Week
All-Ways-Open Market
The Newsvendor ModelThe Newsvendor ModelThe Newsvendor Model
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