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MS&E 252
Decision Analysis I
Problem Session 1
Announcements
Grading policy
Participation used to determine borderline grades
Probabilistic grading covered later
Buddy system
Logistics and basic questions
II additional questions. email own TA
OIIice hours posted on web
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Contacting me.
Gael Le Mens
glemens(stanIord.edu
OIIice hours: Thurs 9:30-11am Terman 348 or
Terman 406A
What we will cover today:
Introduction to Decision Analysis
Types oI decision problems covered in DA1
Socratic method oI teaching
HW Logistics and Probabilistic questions
Decision Education Foundation
Habit 1: Being Proactive (7 habits)
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Making a Decision
We all make decisions. Everyday.
. Some of them are trivial. and some are
reallv important.
. Some of them are simple. and some are
reallv complex.
Decision Analvsis is a coherent, logical approach to
decision-making.
Decision Analvsis is being applied
professionallv in industries like oil and
gas. power generation and distribution.
automobile manufacturing. insurance but
also in financial institutions and complex
medical decisions.
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'Decision Analvsis is the best wav I know for
thinking about how to make a decision.`
Ronald Howard (1966)
What Makes a Decision Hard?
Uncertainty
Lack oI Alternatives
Unclear PreIerences
Non Monetary Values
Time pressure
Etc.
What will
happen iI I
choose A?
Is my choice
really limited to
A and B?
Do I preIer a sure
$100 or a 50-50
shot at $250 vs.
nothing?
How will my
company`s
reputation be
aIIected?
The boss said
he needs my
conclusions by
Monday!
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Decisions vs. Outcomes
One oI the most important distinctions in DA
You determine the quality oI a decision before
knowing the outcome.
Not what people normally think!
'II it turned out bad. it must have been a bad
decision.¨
'He missed the Iield goal; it was obviously the
wrong choice.¨
'I drove drunk and made it home saIely. What`s so
bad about that?¨
Well. anvthing couldve happened. The real question is.
what were the chances of each outcome?
Good decisions lead to a better chance oI
achieving a good outcome
...ou| gccd dccisicns can natc oad cu|ccncs
Diiving solei
and gelling
inlo an
accidenl
Diiving solei
and aiiiving
safeIv
Diiving diunk
and aiiiving
safeIv
Diiving diunk
and gelling
inlo an
accidenl
OuaIilv of Oulcone
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Cood
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Example: Decision Js. Outcome
Suppose vou can choose between deals A and B.
A die is rolled. II the side Iacing
up is a One. you win $1000.
otherwise you win nothing.
Certificate for Deal B
Flip a coin. When it lands. iI the
side Iacing up is Heads. you win
$1000. otherwise you win nothing.
Certificate for Deal A
A
B
. but what mav
happen?
What is Decision Analysis?
Normative Science (vs. Descriptive)
Decision: an allocation oI resources that is
somewhat irrevocable.
'Decision analvsis is a logical procedure for the
balancing of the factors that influence a decision.`
Howard. 'Decision Analvsis. Applied Decision Theorv`
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The Decision Analysis Cycle
Deterministic
Analysis
Probabilistic
Analysis
Appraisal Structure
IniliaI
Silualion ecision
Ileialion
oinuIalion vaIualion ppiaisaI
Decision Analysis Cycle & Tools
Deterministic
Analysis
Probabilistic
Analysis
Appraisal Structure
Ioice IieId Diagians &
Issue Raising
Decision Hieiaichv
Slialegv TalIes
Decision Diagians
Spieadsheel ModeI
1997
NIV
1
2
3
4
1998 1998
Sensilivilv lo Range
Decision Tiees
IiolaliIilv Disliilulions
and Doninance
High-ßase-Lov of
IiolaliIilv disliilulions
AIl 1
AIl 2
AIl 3
Sensilivilv AnaIvsis
VaIue of Infoinalion
Decision OuaIilv
VaIue of ConlioI
p
1-p
1
O
Deleininislic Sensilivilv
Formulate Evaluate Appraise
Decide
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The Roadmap to Decision Analysis
TheoielicaI Ioundalion
TooIs Iianevoik
AppIicalion
Scope of DA I
A frame is a limited description of a problem
that filters what is relevant.
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The Framing Issue
Somewhere in between
Oversight
Blindness
What we will cover today:
Introduction to Decision Analysis
Types oI decision problems covered in DA1
Socratic method oI teaching
HW Logistics and Probabilistic questions
Decision Education Foundation
Habit 1:Being Proactive (7 habits)
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What type oI problems
will we be able to solve?
Decisions with no
uncertainty: we simply
choose the outcome we like
best.
$2OO
$15O
Lolleiv
Suie lhing
$2O
$O
$12
p
1-p
Medical and business
decisions. (eg: where
to drill Ior oil. what
medical treatment to
Iollow. etc.)
There is uncertainty
involved. How do we assess
the uncertainty. how do we
model it. and how do we
decide?
$2OO in lhiee veais
$15O lodav
Financial decisions.
investment sciences.
borrowing. etc.
There is a time issue to be
considered when making
the decision.
How much should we spend in obtaining
additional inIormation beIore we decide? How
much should we pay Ior an option?
VaIue of Infoinalion
Decisions invoIving non nonelaiv
piospecls, oi piospecls vilh dealh
and disaliIilies.
Suigeiv
Tiealnenl
p
1-p
IaiaIvsis
Dealh
q
1-q
Iioduce A
Slalus Ouo
$1 niIIion
($1OO,OOO)
$3OO,OOO
p
1-p
Hov do ve accounl foi
alliludes lovaids iisk`
Hov iolusl is oui decision` Hov IikeIv is
il lo change due lo snaII changes in lhe
assessnenl of oui unceilainlies oi iisk
alliludes`
Sensilivilv AnaIvsis
What type oI problems
will we be able to solve?
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What we will cover today:
Introduction to Decision Analysis
Types oI decision problems covered in DA1
Socratic method oI teaching
HW Logistics and Probabilistic questions
Decision Education Foundation
Habit 1:Being Proactive (7 habits)
Socratic method oI teaching
ProIessor asks many questions. students
participate
Conversation
'negative method oI truth-seeking. in that
truth is Iound by steadily identiIying and
eliminating that which is not true¨
Goal: teach students to think Ior themselves
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What we will cover today:
Introduction to Decision Analysis
Types oI decision problems covered in DA1
Socratic method oI teaching
HW Logistics and Probabilistic questions
Decision Education Foundation
Habit 1:Being Proactive (7 habits)
Problem Session Logistics
Problem Session Assignment
Name Tags
Group Iormation
HW Assignment questions:
DeIinitions and distinctions
Reading assignments
Quantitative problems
Probabilistic questions
Food Ior thought
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Mid-Term Iormat:
15 probabilistic multiple choice questions.
Final Exam Iormat:
Probabilistic questions
Quantitative questions
Exam Formats
You will be required to place a measure oI
belieI on the correct answer.
Probabilistic Questions
ln4
ln
Score ÷ 1 ¹
p
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Rationale behind Probabilistic Questions:
(Strictly Proper Scoring Rule)
Requires you to express your belieIs about
an uncertainty;
You maximize your expected score by
reIlecting your true belieIs.
Probabilistic Questions
The good news:
You can gain partial credit on a multiple
choice question.
The bad news:
Severe penalties are possible!
Probabilistic Questions
Optimal strategv
accuratelv express vour beliefs'
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Why are we making you suIIer tough
probabilistic questions?
This course is about decision making.
The hardest part oI making decisions is dealing
with uncertainty.
ThereIore. we want you to become Iamiliar with
expressing your uncertainty with probabilities.
What letter occurs most in the word 'bubble¨?
a) l
b) u
c) b
d) e
a b c d
.so allow for mistakes. we all make them'
What iI I assign a probability 0 to the correct
answer?
I get a 0 to the question
AND
My Letter grade Ior the class is lowered by 2
marks
A becomes B¹
A- becomes B
.
Never assign a probability 0!!!
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What we will cover today:
Introduction to Decision Analysis
Types oI decision problems covered in DA1
Socratic method oI teaching
HW Logistics and Probabilistic questions
Decision Education Foundation
Habit 1:Being Proactive (7 habits)
The Decision Education Foundation
(DEF)
A volunteer non-profit group,
formed to help people improve
their lives by improving the
quality of their decisions.
The founding members, including
decision experts at Strategic
Decisions Group (SDG) and
Stanford University, want to
broaden public awareness of what
they do every day.
The goal is to develop decision-
making as a life skill with an initial
concentration on American youth
through high school, along with
their parents and teachers.
Better Decisions
Make
Better lives
www.decisioneducation.org
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What we will cover today:
Introduction to Decision Analysis
Types oI decision problems covered in DA1
Socratic method oI teaching
HW Logistics and Probabilistic questions
Decision Education Foundation
Habit 1:Being Proactive (7 habits)
Lesson Plan
Review oI key concepts
Personal responsibility
Proactive vs. reactive behavior
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Key concepts
A decision is a conscious choice that leads directly to some action.
Some decisions we make can shape our lives Ior better or worse.
A good decision has six essential elements:
1. HelpIul Irame
2. Creative alternatives
3. UseIul inIormation
4. Clear values
5. Sound reasoning
6. Commitment to Iollow-through
Good decision-making involves both head and heart.
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Personal Responsibility
Suppose it was not Phil Slackmeyer who was being
eulogized. but you. How would you want to be
remembered?
Whose responsibility is it to make the decisions that
aIIect your liIe?
Each oI us is (or should be) responsible Ior making
the big decisions that shape our own lives.
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Being pro-active is
the opposite oI being reactive.
Stimulus
Automatic
response
Cruising Along
Being Reactive
Stimulus
Conscious
Choice
C
h
os
en
R
esp
o
n
s
e
Being Pro-active
Pro-activity is evident in the words we use.
Proactive
I choose to go
I control my own feelings
Let’s explore alternatives
I can ….
Reactive
I have to go
He makes me so mad
There’s nothing I can do
If only ….
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Reactive people tend to Iocus on their Circle oI Concern;
Proactive people operate within their Circle oI InIluence.
Things I worry
about but cannot
do anything about
6|R6LE 0F
|NFLUEN6E
6|R6LE 0F
|NFLUEN6E
Things I can do
something about
Being pro-active means not making excuses
Ior your own behavior
Excuses:
· I can`t help it that`s iust the way I am.
· It`s my parents` Iault that`s the way I
was raised.
· Don`t blame me my Iriends made me
do it.
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Topics Covered
Good decision good outcome
'Fair Coin¨
What to pay Ior a bid!
Topics covered in lecture today
Questions?

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