68 views

Uploaded by Jea Balagtas

Ch5

- QM Ch4-I
- 19chkenblacksolution-130815163353-phpapp01.pdf
- Lecture 05
- Dokumen.docx
- MB0048-SUMMER-2016
- Chap 03a Decision Analysis-soan
- Decision Making Under Uncertainty
- Organization Theory
- Lec 7 Decision Trees 17
- Decision Analysis.lecfinal
- Week 5_chapter 6_decision Making
- 2A Decision Making
- ch02_sup
- Decision Theory
- AOR Tutorial Questions
- 5_6213056680591097997 (1)
- Decision Making
- 46273746 Open See Same Paper 1
- THE CORRELATION BETWEEN BUYING EXPENSIVE BRANDS, NEWEST STYLE PRODUCT AND YOUNG ADULT DECISION MAKING STYLE
- Decision Making

You are on page 1of 11

DECISION THEORY

Teaching Notes

The presentation of decision theory is standard except for the addition of material on sensitivity analysis.

Decision theory can be omitted if it does not suit your purposes, without loss of continuity.

The presentation should emphasize that decision tables are developed for one-phase decision-making,

whereas decision trees are developed for multi-phase decision-making where several interrelated

decisions and state of nature are considered, and the decisions are dependent on each other and the states

of nature. Decision analysis forces the decision maker to study the states of nature (conditions) carefully

because probabilities must be assigned to each state of nature. The decision analysis provides the

decision maker with reasonably objective method of evaluating the relative value of each decision

alternative

Answers to Discussion and Review Questions

1. The chief role of the operations manager is as a decision maker.

2. Decision making consists of the following steps:

(1) Identify possible future conditions (states of nature).

(2) Develop alternatives.

(3) Determine the payoffs.

(4) Estimate the probability of each future condition.

(5) Evaluate alternatives according to decision criteria, and select the best alternative.

3. Bounded rationality is a term that refers to rational decision-making made within limits imposed

by costs, human abilities, time, technology, and availability of information. Another name for it is

satisficing.

4. Suboptimization occurs as a result of different departments, each attempting to reach a solution

that is optimum for that department but may not be optimum for the organization as a whole.

5. Poor decisions can be due to bounded rationality, which refers to limits on decision making in

terms of cost, technology, human abilities and availability of information; managerial style

(including quick decisions, unwillingness to admit a mistake, and procrastination); and

organization difficulties, which can be related to departmentalized decisions (which often lead to

interdepartment conflicts and suboptimization).

6. A payoff table shows the expected payoffs for each alternative in every possible state of nature.

7. Sensitivity analysis refers to examining how sensitive a given solution is to a change in one or

more parameters of a problem. High sensitivity indicates to decision makers that a parameter

must be carefully estimated or determined; low sensitivity would not require such careful

estimation. Also, decision makers can use sensitivity analysis to explore how a change in the

value of a parameter would effect a solution.

8. Maximax is an optimistic approach that calls for selection of the alternative which has the best

possible payoff; maximin is a conservative approach which seeks the alternative with the best

"worst payoff. Thus, if the mood is "go for it" maximax would be used, while if the mood is

cautious, maximin would be more appropriate.

66

Operations Management, 2/ce

9. The expected monetary value approach implies a linear utility for payoff (e.g., a payoff of $2 has

twice the utility of a payoff of $1) and risk-neutral attitude towards risk. When multiple decisions

are to be made, the expected payoff approach is often used; similarly, when a series of on-going

decisions on projects, new equipment, etc. are to be made, expected value can be useful.

Conversely, for unique, one-time type decision, where utilities are nonlinear, and for people with

risk aversion and risk lovers, expected value would not be appropriate. Of course, the expected

value approach requires probabilities for states of nature. If these are not available, the approach

cannot be used.

10. a. The Laplace criterion is an approach to decision making under uncertainty. It treats the states

of nature as equally likely.

b. Minimax regret is an approach to decision making under uncertainty. It seeks to minimize the

maximum opportunity loss, or regret, associated with decisions.

c. Expected monetary value is an approach to decision making under risk: the probabilities of

states of nature are assumed to be known. It involves choosing that decision that has the

highest expected payoff value.

d. Expected value of perfect information is the maximum amount a decision maker should be

willing to pay to move from a position of decision making under risk to a position of decision

making under certainty.

11. In order to use an expected monetary value approach to decision making, a decision maker must

have state of nature probabilities (in addition to a list of alternatives, a list of states of nature, and

a set of payoffs). If probabilities are unknown, either additional resources can be used to attempt

to ascertain the probabilities, or an approach can be adopted which does not call for probabilities.

Sensitivity analysis could be used to show the range of probability for which a particular

alternative would be optimal. Thus, it may not be necessary for a decision maker to pinpoint a

probability; rather, it may only be necessary to decide if a probability is in this "ballpark."

12. First using sensitivity analysis, the manager can find out which decision is more robust, i.e., will

result in highest EMV under varied probabilities for future conditions. The manager can also look

at other criteria such as maximin. Finally, other non-monetary operations factors such as space

availability can be used to break the tie.

Solutions

1. a. Maximax: Expand [$80 is the highest payoff]

b. Maximin: Worst payoffs:

Do Nothing: 50 [best of the worst payoffs]

Expand: 20

Subcontract: 40

c. Laplace: Average Payoff

Do Nothing 55 [Indifferent between Do Nothing

Expand 50 And Subcontract]

Subcontract 55

d. Minimax Regret

Low High Worst = maximum regret

Do Nothing 0 20 20

Expand 30 0 30

Subcontract 10 10 10 [best of worst]

2. a. Expected profit

Do Nothing .3 (50) + .7 (60) = $57

Expand .3 (20) + .7 (80) = $62 [Best]

Subcontract .3 (40) + .7 (70) = $61

b. .3 $50

$57 .7

Do Nothing $60

$62 .3 $20

Expand

.7

$80

$61 .3

Subcontr. $40

.7

$70

Expected profit under risk: 62

EVPI: $9

Any market research is at most worth $9000 to the contractor.

80

3. Let P = P (high) 70

Equations: Do Nothing 60

Do Nothing: 50 (1 - P) + 60P = 50 + 10P 50

Expand: 20 (1 - P) + 80P = 20 + 60P 40 Subcontract

Subcontract: 40 (1 - P) + 70P = 40 + 30P

20 Expand

Optimal ranges: ___P___

Do nothing: 0 to < .50

Expand: .67 to 1.00 P

0 .50 .67 1.0

Subcontract: .50 to .67

Solutions (continued)

4. a. (1) Draw the tree diagram:

Build Small

2

Demand High (.6) Expand

1 $450,000 (3)

Demand Low (.4) $-10,000 (4)

Build Large

(2) Analyze decisions from right to left (i.e., work backwards from the end of the tree

towards the root). For instance begin with decision 2 and choose expansion because it has

a higher present value ($450,000 vs. $50,000).

(3) Compute the expected value of the ends of the remaining branches (numbered 1 to 5 in

the diagram), and then determine the expected value for the two initial alternatives.

(1) .4 x $400,000 = $160,000

(2) (eliminated) $430,000 (expected value if

(3) .6 x $450,000 = $270,000 Build small is chosen)

(4) .4 x -$10,000 = $-4,000

(5) .6 x $800,000 = $480,000 $476,000 (expected value if

Build large is chosen)

(4) Since the expected value of building a large plant has the higher expected value, select

the large plant alternative.

b. Expected payoff under certainty: .4(400,000) + .6 (800,000) = $640,000

Expected payoff under risk: 476,000

Expected value of perfect information: $164,000

Build small = 400P + 450 (1 P) 800

= 450 50P

= 800 810P

450

450 50P = 800 810 P Build Small

400

760 P = 350

P = .46

Build Large

Build small if P(low) .46

Build large if P(low) < .46

0

.46 1

P (low)

-10

Solutions (continued)

5. EVsubcontract= (.4)(1.0) + (.5)(1.3) + (.1)(1.8) = 1.23

EVexpand = (.4)(1.5) + (.5)(1.6) + (.1)(1.7) = 1.57

Alternative (a) Max. Payoff (b) Min. Payoff (c) Average (d) Max. Regret

Renew $4,000,000 $500,000* $2,250,000 $4,500,000

Relocate $5,000,000* $100,000 $2,550,000* $3,900,000*

Decision: Relocate Renew Relocate Relocate

a. Renew 500,000(.35) + 4,000,000(.65) = $2,775,000*

Relocate 5,000,000(.35) + 100,000(.65) = $1,815,000

Decision: Renew lease

c. EVPI = EPC EMV

Motel Approved (.35)

= .35(5,000,000) + .65(4,000,000) - 2,775,000 = $1,575,000E.V.

$500,000

Yes, the manager should sign the lease for $24,000 since it$2,775,000*

is less than the EVPI of

$1,575,000. Rejected (.65)

Renew $4,000,000

8. Let P (application is approved) = x. Then P (application rejected) = 1 - x.

From Problem 6.

Renew: 500,000x + 4,000,000(1 - x) = 4,000,000 - 3,500,000x

Relocate: 5,000,000x + 100,000(1 - x) =(.35)

Approved 100,000 + 4,900,000x

The two alternatives are equally good when

Relocate $5,000,000

4,000,000 - 3,500,000x = 100,000 + 4,900,000x $1,815,000

Rejected (.65)

i.e. when x = 3,900,000 $100,000

= 0.4643

8,400,000

Solutions (continued)

Exp.

Value

5

(millions) Renewal better than 5

Relocation 100,000 + 4,900,000x

4

Renew Relocate 4

3 3

4,000,000 3,500,000x

2 2

Relocate

1 1

.5

0.1 x = .4643 P (application approved)=x

a. Not sensitive (i.e., p (approve) can increase to .46 and still the decision remains renew.

b. Very sensitive because .45 is very close to .464, at which point decision should be

changed.

EV EV= $2,775,000 $1,815,000 = $960,000

$960,000 = .65D

D = $1,476,923

$4,000,000 $1,476,923 = $2,523,077

Range is $2,523,077 or more.

EMV

9. Demand $ 42 .2(42)

.2 Low

.8 High Subcontract

42 + 46.8

2

Expand

48 .8(48)

Small

.2 Low 22 .2(22)

Medium

1 .8 High Do Nothing

46 44.4

+

2

Expand 50

Large .8(50)

72 .8(72)

b. Max (42;22;-20) = $42 million.

Decision: Build a small facility.

c. EVPI = EPC EMV

EPC = 42(.2) + 72(.8) = $66.0

EVPI = $66.0 53.6 = $12.4

Would be willing to pay up to $12.4 million to find out the demand.

d. Let P(high) = x P(low) = 1-x

I. Small: 42(1-x) + 48x => 42 + 6x

II. Medium: 22(1-x) + 50x => 22 + 28x

III. Large: -20(1-x) + 72x => -20 + 92x

Value of x where expected value for I and III are the same.

42 + 6x = -20 + 92x => 86x = 62 => x = 0.721

72

50

Small

42 48

Medium

22

Large

0 .721 1.0

-20 P (High)

10.

do nothing

90 + $104

buy 1 .70 high demand

subcontract

2 110 .7(110)

buy 2nd

100

.30 low

75 .3(75)

buy 2

+ $113.5 (optimum)

.70 high 130 .7(130)

Solutions (continued) 1/3

0

1/3 60

11. 1

1/3

90

50

.30 40

.50

4 44

Alternative A 60

.20

49 1/3

(45)

1/3

2 45

1/3 99

Alternative B 40

.30

40

.50

5 50

.20 30

1/2

45 40

3

EV1 = (1/3)(0) + (1/3)(60) + (1/3)(90) = 50 1/2

50

EV2 = (1/3)(-45) + (1/3)(45) + (1/3)(99) = 33

EV3 = (1/2)(40) + (1/2)(50) = 45

EV4 = (.3)(50) + (.5)(44) + (.2)(60) = 49

EV5 = (.3)(40) + (.5)(50) + (.2)(45) = 46

(max) (min)

Reassign 50 60 85 85 50 65

New Staff 60 60 60 60* 60 60 (tie)

Redesign 40 50 90 90 40* 60

a. Minimax: New staff

b. Minimin: Redesign

c. Regret table:

Reassign 10 10 25 25

New Staff 20 10 0 20*

Redesign 0 0 30 30

d. New Staff or Redesign (tie).

Solutions (continued)

New Staff: .10(60) + .30(60) + .60(60) = 60 *

Redesign: .10(40) + .30(50) + .60(90) = 73

b.

.10 Moderate

50

Reassign .30 High

74 60

.60 Very High 85

.10 Moderate

60

New Staff .30 High

60 60 60

.60 Very High 60

.10 Moderate

40

Redesign .30 High

73 50

.60 Very High 90

Moderate High Very High Expected

Regret

Reassign 10 10 25 19

New Staff 20 10 0 5* (min)

Redesign 0 0 30 18

EVPI=$5(000) (.1) (.3) (.6)

50

Reassign .30 High

74 60

.60 Very High

85

.10 Moderate

Hire 2 60

Initially .30 High

60 60

.60 Very High

New Staff 60

60 60 .10 Moderate

40

.30 High (Hire 1 more)

74.5 75

Hire 1 .60 V. High (Hire 1 more)

Initially 80

.10 Moderate

40

Redesign .30 High

73 50

.60 Very High

90

Hire 2 initially.

Solutions (continued)

15. a. Let P = p (#2)

Payoff Payoff

#1 #2

A: 20 (1-P) + 140 P = 20 + 120 P

B: 120 (1-P) + 80P = 120 40 P

C: 100 (1-P) + 40P = 100 60P 140

120 B A

100

C B

80

C

A

40

0 .625 1.0 P

b. Alternative C is lower than Alternative B for all values of P(#2), so it would

never be appropriate.

c. EV = 120 - 40P; EV= 20 + 120P. Solving, P = .625.

Therefore, choose Alternative A if P(#2) is greater than .625.

d. For P(#1), choose Alternative A, if P(#1) is less than .375 (i.e., 1.000 - .625).

b. Alternative B is now the one that is never appropriate.

c. EV= 20 + 120P; EV= 100 - 60P. Solving, P = .444.

Therefore, choose Alternative A for P(#2) less than .444, and choose

Alternative C for P(#2) greater than .444.

d. In terms of P(#1), choose A for P(#1) greater than .556 = 1 - .444

10

EV1 = 10 (1 P) + (-2) P = 10 12P #1

EV2 = 8 (1 P) + 3P = 8 5P 8 #2

7

EV3 = 5 (1 P) + 5P = 5 0P #2 #4

EV4 = 0 (1 P) + 7P = 0 + 7P #3 5

5

2

EV1 = EV2 => 10-12P = 8-5P => P = = .285

7

3

EV2 = EV3 => 8-5P = 5 => 5P = 3 => P = .6

#4

EV3 = EV4 => 5 = 7P => P = .714

If P < .286 => Choose #1; if .286 P < .60 => Choose 0 1.0

.286 .60 .714

#2; if .6 P < .714 => Choose #3; if P .714 => Choose #4

-2

Solutions (continued)

18. EV= 120 (1-P) + 20P = 120 100P .30 .80 a. A: P(2) < .30

B: never

120 C: P(2) .8

EV= 60 (1-P) + 40P = 60 20p

A Profits 110 D: .3 P(2) < .8

EV= 10 (1-P) + 110P = 10 + 100p C

D b. A: never

90 90

EV 90 (1-P) + 90P = 90 B: .417 P(2) < .75

C: P(2) < .417

D: P(2) .75

60

B

C 40

Costs A

20

10

EV= EV => 120 100P = 90 => P =.3

P (#2)

EV= EV => 90 = 10 + 100P => P = 80

- QM Ch4-IUploaded byAmir Al Hussein
- 19chkenblacksolution-130815163353-phpapp01.pdfUploaded byMorgan Afrizal
- Lecture 05Uploaded bypraneix
- Dokumen.docxUploaded byWahyu
- MB0048-SUMMER-2016Uploaded bysmu mba solved assignments
- Chap 03a Decision Analysis-soanUploaded byNguyên Bùi
- Decision Making Under UncertaintyUploaded byLea Ratay
- Organization TheoryUploaded byValentin Badalan
- Lec 7 Decision Trees 17Uploaded byFarooqChaudhary
- Decision Analysis.lecfinalUploaded byJoyce Ann Jarabelo Juyo
- Week 5_chapter 6_decision MakingUploaded byRizwan Zisan
- 2A Decision MakingUploaded byAbbas Karmali
- ch02_supUploaded byMadhusudhan Kandula
- Decision TheoryUploaded byLeahn Dagum Perez
- AOR Tutorial QuestionsUploaded bySurya
- 5_6213056680591097997 (1)Uploaded byNisargParmar
- Decision MakingUploaded byDaud Farook II
- 46273746 Open See Same Paper 1Uploaded byMahendra Koley
- THE CORRELATION BETWEEN BUYING EXPENSIVE BRANDS, NEWEST STYLE PRODUCT AND YOUNG ADULT DECISION MAKING STYLEUploaded byfairus
- Decision MakingUploaded byShahid Ahmed
- DecisionmakingUploaded byChaitanyachandra Ravula
- Final Decision Making With Relevant Costs Chap_9 IMTUploaded bybookhunter01
- 7 2 McDonaldUploaded byGilbertmichy
- Decision MakUploaded byNejla Ben Othman
- MS(syllabus-2009-10)Uploaded byPatriqKaruriKimbo
- Chapter 06Uploaded byShafi Shah
- A Chinese Checkersplaying ProgramUploaded byramachandra
- Untitled 4Uploaded byMike Serafino
- Family Decision Making and Coalition PatternsUploaded byWhitney Campbell
- Economics 1Uploaded bySravaan Reddy

- Chapter 17Uploaded byJea Balagtas
- Chapter 14Uploaded bylander21
- Fin Man ReviewerUploaded byJea Balagtas
- Ch13 Cash FlowsUploaded byJea Balagtas
- Obligations and Contracts NotesUploaded byJack Jamero Jr
- Obligations and Contracts NotesUploaded byJack Jamero Jr
- Business LawUploaded byPutoy Itoy
- Oblicon Legal NotesUploaded byAutumn
- Scribd Legal NotesUploaded byJea Balagtas
- cparUploaded bymxviolet
- Finacc vol 2 chapter 3.pdfUploaded byJea Balagtas
- FinanceUploaded byJc Buenaventura
- Hillyard CompanyUploaded byJea Balagtas
- Auditing Theory Test BanksUploaded byJea Balagtas
- Sicam vs Jorge Case DigestUploaded byJea Balagtas
- Yobido vs CAUploaded byJea Balagtas
- ACC201 Lecture 02Uploaded byJea Balagtas
- ampongan chap 1Uploaded byiamjan_101
- Sicam v. JorgeUploaded byEcnerolAicnelav
- Sicam v. JorgeUploaded byEcnerolAicnelav
- ACCT 101 Lecture Notes Chapter 12 F09Uploaded byJea Balagtas
- ACCT 101 Lecture Notes Chapter 11 F09Uploaded byJea Balagtas
- ACCT 101 Lecture Notes Chapter 4 F10Uploaded byJea Balagtas
- pangetUploaded byAngela Viernes
- ACCT 101 Lecture Notes Chapter 10 F09Uploaded byJea Balagtas
- Accounting ConceptsUploaded byvinujohnpanicker
- Accounting Theory and Conceptual FrameworksUploaded bymd abdul khalek
- Accounting Theory and Conceptual FrameworksUploaded bymd abdul khalek
- ACC201 Lecture 01Uploaded byJea Balagtas

- 04_Jackknife.pdfUploaded byuniversedrill
- Applied Statistics From Bivariate Through Multivariate Techniques.pdfUploaded byVlad Burtaverde
- Anwida Curriculum VitaeUploaded byapi-3804290
- DAM STAAD AISC 360.pdfUploaded byaa_bb1347
- Chapter 3: Quadratic FunctionsUploaded byHayati Aini Ahmad
- Application of MCDM model for assessing suitability of JIT ManufacturingUploaded byJournal of Computing
- Practice.finalUploaded bylawsonz1
- Lecture9 Conditioning and IndependenceUploaded bysourav kumar ray
- A simultaneous optimization approach for off-line blending and scheduling of oil-refinery operations.pdfUploaded byahmed1581973
- HW7Uploaded byClement Runtung
- Testing a Taxonomy to Facilitate E-AssessmentUploaded byBobby Elliott
- slack1Uploaded bydhirendra
- Analysis of Cyanide in BloodUploaded bySaiful Islam Robbani
- The Application of a Simulated Annealing Fuzzy ...Uploaded byYosi Nitalia
- The Effect of Outpatient Service Quality on Patient Satisfaction in Teaching Hospitals in IranUploaded byAmirahShaleha
- Punjab University MA & MSc Date Sheet 2013Uploaded byShawn Parker
- Decision on Maintenance Period for Power TransformerUploaded byLaura Rosero
- asnotes10Uploaded byAmy Li
- Composite Functions IntroUploaded bykasutbiru
- artofdatascience.pdfUploaded bymsfts.
- Moment Distribution Method - Wikipedia, The Free EncyclopediaUploaded byਤਨ੍ਹਾ ਰਾਜੀਵ ਮਾਯੂਸ
- Lecture Notes 11-Initial Value Problem ODEUploaded byTebsu Tebsuko
- C34 june 2018 (qp).pdfUploaded byAnon - NIS student
- Calculus ProblemsUploaded byDEVANSHU GARG
- ControlUploaded byFawaz Parto
- Chap 1Uploaded byTey Kaijing
- Reliability Analysis and Design of the RCC Beam by FOSM MethodUploaded bytruenotesrakesh
- Metodo de Separacion de VariablesUploaded byRoy Vallejo
- ForecastingUploaded byJames Nilesh Mulenga
- SyllabusECE660_Spring2017Uploaded byhanytheking