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DECISION ANALYSIS FOR BUSINESS

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DECISION ANALYSIS FOR BUSINESS
Dr. T.K. Jain.

AFTERSCHO☺OL
Centre for social entrepreneurship Bikaner M: 9414430763 tkjainbkn@yahoo.co.in www.afterschool.tk, www.afterschoool.tk
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EVPI
• Expected Value of Perfect Information • the maximum amount which the decision maker can spend for obtaining the perfect information as to which event would occur is called EVPI. • EVPI = expected profit with perfect information - expected monetary value of optimal act.
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EXAMPLE…
• A physician purchases a particular medicine on Monday of each week. The medicine must be used within the week following, otherwise it becomes worthless. The medicine costs Rs. 2 per dose and Physician charges Rs. 4 per dose. The past 50 weeks record of uses are as foliows • Dose per week 20 25 40 60 • No. of weeks 5 15 25 5
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Solution – payoff matrix
Demand Probabili 20 ty 20 25 40 60 EMV 5/50 = .1 40 15/50=.3 40 25/50=.5 40 5/50=.1 40
Optimal action

25 30 50 50 50 48

40 0 20 80 80 54

60 -40 -20 40 120 22
Perfect information
5

40

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SOLUTION….
• • • • EMPI = with perfect information: 40*.1 + 50*.3 + 80*.5 + 120*.1 = 71 EMV = 54 EVPI = 71 – 54 = 17 answer.

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MAXIMIN CRITERION
• The decision maker tries to maximise the minimum gains or he tries to pick the best of the worst.

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MINIMAX REGRET CRETERION
• The decision maker selects that act, which will give the minimum of the maximum opportunity losses. Hence prepare opportunity loss table for each option (act).

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Example = solve it using Maximin and Minimax criterion
Action S1 S2 S3
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A 8 -4 14

B 0 12 6

C 10 18 9

D 6 -2 8
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AFTERSCHO☺OL's MATERIAL FOR PGPSE PARTICIPANTS

MAXIMIN
Action S1 S2 S3 A 8 -4 14 B 0 12 6 C 10 18 9 D 6 -2 8 MIN. 0 -4 6
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AFTERSCHO☺OL's MATERIAL FOR PGPSE PARTICIPANTS

SOLUTION
• Maximin is 6, because it is maximum out of the minimums.

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MINIMAX OPPORTUNITY LOSS TABLE
Action S1 S2 S3 A 6 18 0 B 12 0 6 C 8 0 9 D 2 10 0 max regret 12 18 9
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AFTERSCHO☺OL's MATERIAL FOR PGPSE PARTICIPANTS

Solution …
• We will first identify the regrets for each value, then select maximum regret for each row and then pick up the minimum regret out of all the regrets (which are maximum from their rows). For calculating regrets, subtract each value from the maximum value from its column.

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Decision tree…
• An organisation has two packaging machines old and new. the new machine is more efficient if the materials are of good quality; on the other hand the old machine performs better if the materials are of poor quality. The following information is available • (i) In the previous batches 80% of the materials have been of good quality and 20% of poor quality • (ii) The profit position is as under • (a) Using old machine • If the materials are good Profit of Rs. 2,000 If the materials are poor Profit of Rs. 1,600 • (b) Using new Machine • If the materials are good Profit of Rs. 2,400 • If the materials are poor Profit of Rs. 800 You have to decide which machine should be used under the condition that quality of the materials is not known at this stage.
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Decision tree….
2000 Good old P = .8 1600 + 320 = 1920 poor 1600 p =.2

NEW

Good

2400 p =.8 1920+160

Poor

=2080 800 P = .2
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Solution ….
• When we prepare a decision tree, we are preparing a list of all the options with their respective payoffs along with their probabilities. The option, which has the highest payoff possibilities is selected based on the computations.

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• A client asks an estate agent to sell three properties A, B and C:. The agent has to sell A first within 60 days. If he is successful he can either backout or try to sell B or C. After selling second again either he can backout or try to sell third. He receives 5% commission on each sale. The detail is given in next slide:
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Continued..
Property A B C Cost 400 225 450 Probability .7 .6 .5 Selling price 12000 25000 50000

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Decision tree ..
765 Sold b 884 200 Sell A .7 Sell B .6 1063 Sell C .5 .3 Fail -400 1288 Fail .4 -225 backout Try B so ld c Backo ut 525 fail Sold b Sell C .5 800 400 Sold C

Final expected value = 764
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Tabular presentation ….
• We will try for each option. We will look at all the possibilities and multiply those with respective probabilities to find their expected payoffs. First option : sell B :
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Sell S Fail Sell Fail B uce C ed

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Solve it …
• A businessman has two independent investments A and B available to him : but he lacks the capital to undertake both of them simultaneouly He can choose to take A first and then stop, or if A is successful then take B, vice versa. The probability of success of A is 0.7, while for B it is 0.4. Both investing ii require an initial capital outlay of Rs. 2,000 and both return nothing if the venture unsuccessful. Successful completion of A will return Rs. 3,000 (over cost) successful completion of B will return Rs. 5,000 (over cost).
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Decision tree
800 2660 A 2060 600 fail Drop succe ss 1400 2600 B -1200 Fail
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succes s B

s

s

A 1500 Fail Drop
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About AFTERSCHO☺OL
• PGPSE - World’s most comprehensive programme on social entrepreneurship – after class 12th • Flexible – fast changing to meet the requirements • Admission open throughout the year • Complete support from beginning to the end – from idea generation to making the project viable.
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Branches of AFTERSCHO☺OL
• PGPSE programme is open all over the world as free online programme. • Those who complete PSPSE have the freedom to start branches of AFTERSCHO☺OL • A few branches have already started one such branch is at KOTA (Rajasthan).

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Workshop on social entrepreneurship
• We conduct workshop on social entrepreneurship – all over India and out of India also - in school, college, club, association or any such place - just send us a call and we will come to conduct the workshop on social entrepreeurship. • These workshops are great moments of learning, sharing, and commitments.
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FREE ONLINE PROGRAMME
• AFTERSCHO☺OL is absolutely free programme available online – any person can join it. The programme has four components : • 1. case studies – writing and analysing – using latest tools of management • 2. articles / reports writing & presentation of them in conferences / seminars • 3. Study material / books / ebooks / audio / audio visual material to support the study • 4. business plan preparation and presentations of those plans in conferences / seminars
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100% placement / entrepreneurship
• AFTERSCHO☺OL has the record of 100% placement / entrepreneurship till date • Be assured of a bright career – if you join AFTERSCHO☺OL

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Pursue professional courses along with PGPSE
• AFTERSCHO☺OL permits you to pursue distance education based professional / vocational courses and gives you support for that also. Many students are doing CA / CS/ ICWA / CMA / FRM / CFP / CFA and other courses along with PGPSE. • Come and join AFTERSCHO☺OL

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