THEORY OF DECISIONS

PHASE 2 - SOLVE PROBLEMS BY APPLYING THE ALGORITHMS OF THE UNIT 1 -

DELIVERY OF THE ACTIVITY

 Aldemar González
González Martínez.
Code 1099365901
Group 212066_31

September 2018
National open and distance university (UNAD).
CEAD Valledupar.
 Introduction

The successful decision-making is a high impact issue for the successful

progress of any of the social, economic, political and educational approaches, where

you can always expect to generate the best result, for this the importance of tools such

as the decision tree, According to the evaluation and study carried out, the results of

this study lead us to determine which of the options is the most useful for what I am

looking for.

Knowing how to use the tool means that we can find the expected value of the perfect

information and the expected value of the information show, variables that determine

with figures that are close to reality and thus be able to guide a decision maker towards

the best alternative , helping to avoid risks.

 DEVELOPMENT OF THE ACTIVITY

Problem 1. DECISION TREES, EVPI and EVMI

Teratex, a textile company that has a productive experience in the foreign market of 25
years, must decide if it manufactures a new product in its main plant, or if on the
contrary the purchase from an external supplier. The profits depend on the demand of
the product. The table shows projected profits, in millions of dollars.

Table 1. Decision process for the commercialization of the product

States of nature
Decision
Demand low- Demand low Demand High -
alternative
utility average - utility utility
Manufacture 221 251 310
Subcontract 210 225 278
Buy 195 236 289
Probabilities Ʃ =
1 0,35 0,42 0,23

a. Use EVPI to determine if the company should try to get a better estimate of the demand.
DEMANDA
Low 0,35 221
Manufacture Node 2 Half 0,42 251 254,07    N
   O
   I
High 0,23 310    S
   I
   C
   E
   D
Low 0,35 210   - It would be recommended to
   1 Node 2
Node 1 Subcontract Node 3 Half 0,42 225 231,94    E manufacture  with an expected value of $
   D 254,07
High 0,23 278    O 254.07 million for being the one that
254,07    N
   T
   L
   U
Low 0,35 195    S
   E
233,84    R
Buy Node 4 Half 0,42 236
High 0,23 289

EVPI EVwith PI - EVwithout PI

EVwith PI 254,07
EVwithoutPI 254,07
The expected value of the perfect information is 0
EVPI 0,00
 High 0,45 310
Manufacture Node 4 Half 0,39 251
272,62 Low 0,16 221

0,425 High 0,45 278

FAVORABLE Node 2 Subcontract Node 5 Half 0,39 225
246,34 Low 0,16 210

High 0,45 289

Buy Node 6 Half 0,39 236
253,17 Low 0,16 195

Node 1
MARKET
RESEARCH
High 0,28 310
264,69 Manufacture Node 7 Half 0,44 251
258,82 Low 0,28 221

High 0,28 278

UNFAVORABLE Node 3 Subcontract Node 8 Half 0,44 225
0,575 235,40 Low 0,28 210

High 0,28 289

Buy Node 9 Half 0,44 236
Decision nodes chosen 239,06 Low 0,28 195

Interpretation: the market study would have a payment of 264.64 million, If favorable,
the best option would be Fabricate with a payment of 272.62 million; equally if it were
unfavorable, the best option would also be Fabricate with a payment of 258.82 million.

c. What is the expected value of market research information?

EVMI EVwhithMI - EVwithout PI

EVMI 264,69 254, 07
EVMI 10,62

d. What is the efficiency of the information?

EVMI (10,62)
E 0,00 0%
EVPI (0,0)

Interpretación: the market study would be 100% efficient because the EVPI is 0

Problem 2. DECISION TREES, EVPI and EVMI

ElectroCom, a company that manufactures electronic components for the introduction in

its product catalog, must decide whether to manufacture a new product in its main plant,
subcontract it with company supervision or if it buys it from an external supplier. The
profits depend on the demand of the product. The table shows projected profits, in
millions of dollars.

Table 2. Decision process for the commercialization of the product

States of nature
Decision Demand
Demand low- Demand low Demand High
alternative High -
utility average - utility Medium - utility
utility
Manufacture 173 183 195 218
Subcontract 181 192 207 213
Buy 183 197 207 215
Lease 125 128 131 137
Outsource 188 192 198 209
Probabilities Ʃ
=1 0,19 0,21 0,28 0,32

a. Use EVPI to determine if t he company should try to ge t a bett er est imate of the demand.
DEMANDA
Low 0,19 173
Low Average 0,21 183
195,66
Manufacture Node 2 High Medium 0,28 195
High 0,32 218

Low 0,19 181

Low Average 0,21 192
200,83
Subcontract Node 3 High Medium 0,28 207
   N
High 0,32 213    O
   I
   S
   I
   C
   E
Low 0,19 183    D It would be recommended to Buy with
  -
Low Average 0,21 197    1 Node 4 an expected value of $ 202,9 million for
202,9    E
Node 1 Buy Node 4 High Medium 0,28 207    D 202,9 being the one that generates the best
   O
High 0,32 215    N utility
202,9    T
   L
   U
   S
Low 0,19 125    E
   R
Low Average 0,21 128
131,15
Lease Node 5 High Medium 0,28 131
High 0,32 137

Low 0,19 188

Low Average 0,21 192
198,36
Outsource Node 6 High Medium 0,28 198
High 0,32 209

EVPI EVwith PI - EV without PI

EVwith PI 204,81
EVwithoutPI 202,9
EVPI 1,91

Interpretación: The expected value of the perfect information is 1,91

 b. A test market study of potential product demand is expected to re port a favorable (F) or unfavorable (U) condition. The relevant

FAVORABLE
Conditional Later
Sta te Pre vious probabilities Joint Probabilities
Probabilities Probabilities
Low 0,19 0,2 0,04 0,11
Low Average 0,21 0,2 0,04 0,12
High Medium 0,28 0,35 0,10 0,29
High 0,32 0,5 0,16 0,47
P (F) 0,338

UNFAVORABLE
Conditional Later
Sta te Pre vious probabilities Joint Probabilities
Probabilities Probabilities
Low 0,19 0,8 0,15 0,23
Low Average 0,21 0,8 0,17 0,25
High Medium 0,28 0,65 0,18 0,27
High 0,32 0,5 0,16 0,24
P (U) 0,662

Low 0,11 173

Low Average 0,12 183
Manufacture Node 4
High Medium 0,29 195
201,92 High 0,47 218

Low 0,11 181

Low Average 0,12 192
Subcontract Node 5
High Medium 0,29 207
205,05 High 0,47 213

0,338 Low 0,11 183

Node 2 Low Average 0,12 197
FAVORABLE Buy Node 6
High Medium 0,29 207
206,85 High 0,47 215

Low 0,11 125

Low Average 0,12 128
Subcontract Node 7
High Medium 0,29 131
132,79 High 0,47 137

Low 0,11 188

Low Average 0,12 192
Buy Node 8
High Medium 0,29 198
201,34 High 0,47 209

Node 1
MARKET
RESEARCH Low 0,23 173
202,90 Manufacture Low Average 0,25 183
Node 9
High Medium 0,27 195
192,46 High 0,24 218

Low 0,23 181

Subcontract Low Average 0,25 192
Node 10
High Medium 0,27 207
198,67 High 0,24 213

Low 0,23 183

Buy Low Average 0,25 197
UNFAVORABLE Node 11
Node 3 High Medium 0,27 207
0,662 200,89 High 0,24 215

Decision nodes chosen Low 0,23 125

Subcontract Low Average 0,25 128
Node 12
High Medium 0,27 131
130,31 High 0,24 137

Low 0,23 188

Buy Low Average 0,25 192
Node 13
High Medium 0,27 198
196,84 High 0,24 209

Interpretation:  the market study would have a payment of 202.90 million, if favorable,
the best option would be to buy with a payment of 206.85 million; equally, if it were
unfavorable, the best option would also be Buy with a payment of 200.89 million.
 c. What is the expected value of market research information?

EVMI EVwhithMI - EVwithoutPI

EVMI 202,90 204,81
EVMI -1,91

d. What is the efficiency of the information?

EVMI (-1,91)
E * 100 -100%
EVPI (1,91)

Interpretation:  It is observed that the EVMI is not efficient against the EVPI, so it would
not be considered necessary to carry out a market study, since instead of helping, it
generates a 100% inefficiency.
Problem 3. DECISION TREES, EVPI and EVMI

Teratextyl, a textile company that has a productive experience in the foreign market of
30 years, must decide if it manufactures a new product in its main plant, or if on the
contrary the purchase from an external supplier. The profits depend on the demand of
the product. The table shows projected profits, in millions of dollars.

Table 3. Decision process for the commercialization of the product

States of nature
Decision alternative Demand low- Demand low average - Demand High Demand High -
utility utility Medium - util ity utility
Manufacture 85 87 91 95
Subcontract 78 81 85 89
Buy 82 85 87 90
Lease 83 85 87 91
Outsource 85 87 89 93
Probabilities Ʃ =1 0,30 0,22 0,25 0,23

a. Use EVPI to determine if the company should try to get a better estimate of the demand.
DEMANDA
Low 0,30 85
Low Average 0,22 87
89,24
Manufacture Node 2 High Medium 0,25 91
High 0,23 95

Low 0,30 78
Low Average 0,22 81
82,94
Subcontract Node 3 High Medium 0,25 85
   N
High 0,23 89    O
   I
   S
   I
   C
   E
Low 0,30 82    D It would be recommended to
  -
Low Average 0,22 85    1 Node 2 Manufacture with an expected value of
85,75    E
Node 1 Buy Node 4 High Medium 0,25 87    D 89,24 $ 89,24 million for being the one that
   O
High 0,23 90    N generates the best utility
89,24    T
   L
   U
   S
Low 0,30 83    E
   R
Low Average 0,22 85
86,28
Lease Node 5 High Medium 0,25 87
High 0,23 91

Low 0,30 85
Low Average 0,22 87
88,28
Outsource Node 6 High Medium 0,25 89
High 0,23 93

EVPI EVwith PI - EVwithout PI

EVwith PI 89,24
EVwithoutPI 89,24
EVPI 0

Interpretation: The expected value of perfect information is 0

 b. A t est market s tudy of potential product demand is expected to report a favorable (F) or unfavorable (U) condition. The relevant

FAVORABLE
Conditional Later
Sta te Previous proba bilitie s Joint Probabilities
Probabilities Probabilities
Low 0,22 0,30 0,07 0,20
Low Average 0,35 0,22 0,08 0,24
High Medium 0,33 0,25 0,08 0,26
High 0,42 0,23 0,10 0,30
P (F) 0,322

UNFAVORABLE
Conditional Later
Sta te Previous proba bilitie s Joint Probabilities
Probabilities Probabilities
Low 0,78 0,30 0,23 0,35
Low Average 0,65 0,22 0,14 0,21
High Medium 0,67 0,25 0,17 0,25
High 0,58 0,23 0,13 0,20
P (U) 0,678

Low 0,20 85
Low Average 0,24 87
Manufacture Node 4
High Medium 0,26 91
90,01 High 0,30 95

Low 0,20 78
Low Average 0,24 81
Subcontract Node 5
High Medium 0,26 85
83,81 High 0,30 89

0,322 Low 0,20 82

Low Average 0,24 85
FAVORABLE Node 2 Buy Node 6
High Medium 0,26 87
86,40 High 0,30 90

Low 0,20 83
Low Average 0,24 85
Subcontract Node 7
High Medium 0,26 87
86,90 High 0,30 91

Low 0,20 85
Low Average 0,24 87
Buy Node 8
High Medium 0,26 89
88,90 High 0,30 93

Node 1
MARKET
RESEARCH Low 0,35 85
89,24 Low Average 0,21 87
Manufacture Node 9
High Medium 0,25 91
88,87 High 0,20 95

Low 0,35 78
Low Average 0,21 81
Subcontract Node 10
High Medium 0,25 85
82,53 High 0,20 89

Low 0,35 82
Buy Low Average 0,21 85
UNFAVORABLE Node 3 Node 11
High Medium 0,25 87
0,678 85,44 High 0,20 90

Decision nodes chosen Low 0,35 83

Low Average 0,21 85
Subcontract Node 12
High Medium 0,25 87
85,98 High 0,20 91

Low 0,35 85
Buy Low Average 0,21 87
Node 13
High Medium 0,25 89
87,98 High 0,20 93

Interpretation: the market study would have a payment of 89.24 million, If favorable,
the best option would be Fabricate with a payment of 90.01 million; equally if it were
unfavorable, the best option would also be Fabricate with a payment of 88.87 million.
 c. What is the expected value of market research information?

EVMI EVwhithMI - EVwithoutPI

EVMI 89,24 89,24
EVMI 0

d. What is the efficiency of the information?

EVMI (0)
E * 100 0%
EVPI (0)

Interpretation: There is NOT something concrete, since the EVPI and EVMI give me 0,
for which neither of the two options is pertinent to choose.
SCREENSHOTS OF THE PRACTICAL STAGE

Exercise 1

Exercise 2

Exercise 3
 Conclusions.

This phase 2, has contributed in a positive way in the way of how to face the

decisions under premises of uncertainty and risk, which allows to speed up the work of

professionals through the use of useful tools such as the decision tree associated with

the expected value of the perfect information and expected value of the sample

information, determining with accuracy the degree of efficiency between the one and the

other, in such a way that the decision making is given in a more complete and accurate

way.

In the same way, this phase has been a demanding and competitive challenge so that

as a student I can learn to develop and undertake new knowledge that strengthens my

quality as a professional, where discipline and entrepreneurship helped to understand

the issues in a consistent and necessary way for what is required.

 Bibliography according to APA standards

Sanderson, C. (2006).  Analytical Models for Decision Making. New York, USA:
McGraw-Hill Education Editorial. Retrieved
from http://bibliotecavirtual.unad.edu.co:2051/login.aspx?direct=true&db=nlebk&AN=23
4098&lang=es&site=eds-live

Gilboa, I. (2001).  A Theory of Case-Based Decisions. Camdridge, UK: Cambridge

University Press Editorial. Retrieved
from http://bibliotecavirtual.unad.edu.co:2051/login.aspx?direct=true&db=nlebk&AN=72
982&lang=es&site=eds-live

Rokach, L. (2008). Data Mining With Decision Trees: Theory And Applications , Bern,
Switzerland: H. Bunke, University Bern, Switzerland. Retrieved
from http://bibliotecavirtual.unad.edu.co:2051/login.aspx?direct=true&db=nlebk&AN=23
6037&lang=es&site=eds-live