Decision Analysis For Business: Afterscho Ol

DECISION ANALYSIS FOR
BUSINESS
AFTERSCHO☺OL
– DEVELOPING CHANGE MAKERS
CENTRE FOR SOCIAL ENTREPRENEURSHIP
PGPSE PROGRAMME –
World’ Most Comprehensive programme in social
entrepreneurship & spiritual entrepreneurship
OPEN FOR ALL FREE FOR ALL
www.afterschoool.tk
02/03/09 AFTERSCHO☺OL's
AFTERSCHO☺OL's MATERIAL
MATERIAL 1
www.afterschoool.tk FOR PGPSE PARTICIPANTS
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
www.afterschoool.tk
02/03/09 AFTERSCHO☺OL's
AFTERSCHO☺OL's MATERIAL
MATERIAL 2
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.
02/03/09 AFTERSCHO☺OL's MATERIAL 3
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

Solution – payoff matrix
Demand Probabili 20 25 40 60
ty
20 5/50 = .1 40 30 0 -40
25 15/50=.3 40 50 20 -20
40 25/50=.5 40 50 80 40
60 5/50=.1 40 50 80 120
EMV 40 48 54 22
Optimal
action Perfect
information
SOLUTION….
• EMPI = with perfect information:
• 40*.1 + 50*.3 + 80*.5 + 120*.1 = 71
• EMV = 54
• EVPI = 71 – 54 = 17 answer.

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

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).

Example = solve it using Maximin
and Minimax criterion
Action A B C D
S1 8 0 10 6
S2 -4 12 18 -2
S3 14 6 9 8

MAXIMIN
Action A B C D MIN.
S1 8 0 10 6 0
S2 -4 12 18 -2 -4
S3 14 6 9 8 6

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

MINIMAX OPPORTUNITY LOSS
TABLE
Action A B C D max
regret
S1 6 12 8 2 12
S2 18 0 0 10 18
S3 0 6 9 0 9

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.

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.
Decision tree….
1600
2000
+ 320
Good P = .8
= 1920
old 1600 p =.2

poor
2400 p =.8
Good
NEW
1920+160
Poor =2080
800 P = .2

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.

• 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:

Continued..
Property Cost Probability Selling
price
A 400 .7 12000
B 225 .6 25000
C 450 .5 50000

Decision tree ..
800
765
Sold b Sold C
400
884 Sell C
Sell B
.5
200 .6
Sell A
Fail
-225.4 backout
.7 1063
Sell
C Try B Sold b
.5 so
ld 525
.3 1288
Fail -400 c
Backo fail
Final expected value = 764 ut

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

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).

Decision tree
800 succes
s
2660 s B
A
2060
600 fail Drop
succe
ss
1400 2600
s
B A
1500
-1200
Fail
Fail Drop

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• A few branches have already started -
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DECISION ANALYSIS FOR

02/03/09 AFTERSCHO☺OL's MATERIAL 4

02/03/09 AFTERSCHO☺OL's MATERIAL 6

02/03/09 AFTERSCHO☺OL's MATERIAL 7

02/03/09 AFTERSCHO☺OL's MATERIAL 8

02/03/09 AFTERSCHO☺OL's MATERIAL 9

02/03/09 AFTERSCHO☺OL's MATERIAL 10

02/03/09 AFTERSCHO☺OL's MATERIAL 11

02/03/09 AFTERSCHO☺OL's MATERIAL 12

02/03/09 AFTERSCHO☺OL's MATERIAL 13

old 1600 p =.2

02/03/09 AFTERSCHO☺OL's MATERIAL 15

02/03/09 AFTERSCHO☺OL's MATERIAL 16

02/03/09 AFTERSCHO☺OL's MATERIAL 17

02/03/09 AFTERSCHO☺OL's MATERIAL 18

Final expected value = 764 ut

02/03/09 AFTERSCHO☺OL's MATERIAL 19

02/03/09 AFTERSCHO☺OL's MATERIAL 20

02/03/09 AFTERSCHO☺OL's MATERIAL 21

02/03/09 AFTERSCHO☺OL's MATERIAL 22

02/03/09 AFTERSCHO☺OL's MATERIAL 24

02/03/09 AFTERSCHO☺OL's MATERIAL 25

02/03/09 AFTERSCHO☺OL's MATERIAL 26

02/03/09 AFTERSCHO☺OL's MATERIAL 27

02/03/09 AFTERSCHO☺OL's MATERIAL 28

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