Decision Analysis

Section 1

 Decision tree: A graphical representation of the decision making situation  Payoff table/Decision Table (Vij): The consequence resulting from specific combination of a decision alternative(di) and a state of nature(sj) or a means of organizing a decision situation. presenting the payoffs from different decisions/alternatives given the various states of nature  State of Nature (Sj):The possible outcomes for a chance event(uncertain future event)  Alternatives: A course of action or a strategy may be chosen by a decision maker A good decision is based on logic. .Definitions  Decision Analysis Theory :An analytical and systematic way to tackle problems and make decisions.

 A decision making environment in which the future outcomes or state of nature are known. Decision maker knows with certainty the outcome of every alternative or decision choice. The decision maker does know the probabilities of the various outcomes. Actually s/he knows nothing!  Type 3: Decision making under risk.  A decision making environment in which the future outcomes or state of nature may occur .Types of DecisionDecision-Making Environments  Type 1: Decision making under certainty.  A decision making environment in which the future outcomes or state of nature may occur as a result of a decision or alternative. .  Type 2: Decision making under uncertainty. The decision maker does not know the probabilities of the various outcomes.

Six steps in Decision Making .

Maximin(pessimistic) 3.Decision Making under Uncertainty 1. Minimax Regret . Maximax(optimistic) 2. Criterion of Realism(Hurwicz) 5. Equally likely(laplace) 4.

Decision Making under UncertaintyUncertaintyCont. MaxiMax . 1-Maximax: Optimistic Approach  Find the alternative that maximizes the maximum outcome for every alternative.

MaxiMin .Maximin: Pessimistic (conservative)Approach  Choose the alternative with maximum minimum output. 2.Decision Making under UncertaintyUncertaintyCont.

Decision Making under UncertaintyUncertaintyCont. 3. Equaly likely .Equally likely (Laplace) Assume all states of nature to be equally likely. choose maximum Average.

4.Criterion of Realism (Hurwicz)/Weighted Average Decision maker uses a weighted average based on optimism of the future.α)*(row min) Realism .  CR = α*(row max)+(1.Decision Making under UncertaintyUncertaintyCont.

Decision Making under UncertaintyUncertaintyCont. MiniMax . 5.Minimax Regret: Choose the alternative that minimizes the maximum opportunity loss .

.  decision Node (point):in a decision tree .this is point where the best of the available alternative is chosen the branches represent the alternative 2.A state-of-nature node out of which one state of nature will occur.Structure of Decision Trees A graphical representation where: 1-A decision node from which one of several alternatives may be chosen.

A State of Nature Node Favorable Market 1 Unfavorable Market A Decision Node Favorable Market Construct Small Plant 2 Unfavorable Market .

5)-$180 Market A Decision Node Construct Small Plant Favorable (0.5) Market 0 .000 A State of Nature Market Node 1 180.000 Unfavorable (0.5) $100.Favorable (0..5) $200.000 Market 2 -$20.000 Unfavorable (0.

com/watch?v=ilr_gUeX H1s .youtube.Intro to decision analysis (video) http://www.

Let’s Start practicing  .