THEORY OF DECISIONS

THEORY OF DECISIONS
CODE: 212066

Phase 8

FINAL PROJECT

Presented to:
Ricardo Javier Pineda
Tutor

Delivered by:

José Ramiro Escobar Cumba – 79845394

July Marin Tolosa – 1023890674
Rodolfo Carrascal Polo - 1129516028

Group: 212066_7

NATIONAL UNIVERSITY OPEN AND DISTANCE - UNAD

BASIC SCIENCE SCHOOL TECHNOLOGY AND ENGINEERING
MAY 22, 2019
BOGOTA
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 THEORY OF DECISIONS

INTRODUCTION

Next, we will find the final work that is collaborative, where we will make a series of
strategies and techniques that will allow us to answer the questions that are asked
about what is appropriate. For this, the descriptions of several companies are
taken into account in a context like the one described and they are given an
answer to what they ask, by using Excel Solver, a tool that helps us solve complex
problems with linear equations where there is no information. A palpable solution is
glimpsed.

Through this work we can also differentiate the different algorithms and their
application in different risk environments for decision making.

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 THEORY OF DECISIONS

Problem 1. Decisions in a risky environment:

A company dedicated to the manufacture of different turned parts must decide
whether to manufacture a new product on its main floor or to buy it from an
external supplier. The benefits depend on the demand of the product. Table 10
shows the projected profits, in millions of pesos.

Table 1. Decision-making process for the marketing of the

product.
Low-
High
Low demand High
average-
Alternative demand- average Demand
demand for
decision utility for public Utility
services
services
Manufacture 124 146 165 182
Subcontratar 121 142 167 180
Buy 122 148 169 188
Lease 116 150 161 180
Lease 119 148 167 183

According to the corresponding information in table 1 and the theory of the

predicted value of perfect information (EVPI), the expected value of the sample
information (EVMI) and the decision trees respond:

a. Use EVPI to determine if the company should try to get a better estimate of
the demand.
Answer:

By definition, we know that

VEIP=¿ VEcIP−VME∨¿
Obtaining this data using excel, we have:

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 THEORY OF DECISIONS

PROBABILITY DEMAND TOTAL

LOW 0,2 124 24,8

MANUFACTURE Node 2 LOW AVERAGE 0,33 146 48,18 195,28

HIGH MEDIUM 0,3 165 49,5

HIGH 0,4 182 72,8

LOW 0,2 121 24,2

SUBCONTRACT Node 3 LOW AVERAGE 0,33 142 46,86 193,16

HIGH MEDIUM 0,3 167 50,1

HIGH 0,4 180 72

LOW 0,2 122 24,4

NODO 1 BUY Node 4 LOW AVERAGE 0,33 148 48,84 199,14

HIGH MEDIUM 0,3 169 50,7

HIGH 0,4 188 75,2

LOW 0,2 116 23,2

LEASE Node 5 LOW AVERAE 0,33 150 49,5 193

HIGH MEDIUM 0,3 161 48,3

HIGH 0,4 180 72

LOW 0,2 119 23,8

LEASING Node 6 LOW AVERAGE 0,33 148 48,84 195,94

HIGH MEDIUM 0,3 167 50,1

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 THEORY OF DECISIONS

VEsIP 195,94

VEcIP 194,14

VEIP 1,8

B. A test market study of the potential product demand is expected to report a

favorable (F) or unfavourable (U) condition. The relevant conditional probabilities
are:

P (F/low) = 0.2 P (D/low) = 0.8

P (F/low average) = 0.36 P (D/low average) = 0.64
P (F/high medium) = 0.33 P (D/high medium) = 0.67
P (F/high) = 0.4 P (D/high) = 0.6

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 THEORY OF DECISIONS

For this problem, we obtain:

PROBABILITY DEMAND TOTAL

LOW 0,13 124 16,12

MANUFACTURE NODE 4 LOW AVERAGE 0,12 146 17,52 165,04

HIGH MEDIUM 0,3 165 49,5

HIGH 0,45 182 81,9

LOW 0,13 121 15,73

FAVORABLE (0,33) NODE 2 SUBCONTRACT NODE 5 LOW AVERAGE 0,12 142 17,04 163,87

HIGH MEDIUM 0,3 167 50,1

HIGH 180 81

LOW 0,13 122 15,86

BUY NODE 6 LOW AVERAGE 0,12 148 17,76 168,92

HIGH MEDIUM 0,3 169 50,7

HIGH 0,45 188 84,6

NODE 1 LOW 0,13 116 15,08

LEASE NODE 7 LOW AVERAE 0,12 150 18 162,38

HIGH MEDIUM 0,3 161 48,3

HIGH 0,45 180 81

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 THEORY OF DECISIONS

LOW 0,13 119 15,47

LEASING NODE 8 LOW AVERAGE 0,12 148 17,76 165,68

HIGH MEDIUM 0,3 167 50,1

HIGH 0,45 183 82,35

LOW 0,27 124 33,48

MANUFACTURE NODE 9 LOW AVERAGE 0,22 146 32,12 151,84

HIGH MEDIUM 0,28 165 46,2

HIGH 0,22 182 40,04

LOW 0,27 121 32,67

UNFAVORABLE (0,67) NODE 3 SUBCONTRACT NODE 10 LOW AVERAGE 0,22 142 31,24 150,27

HIGH MEDIUM 0,28 167 46,76

HIGH 0,22 180 39,6

LOW 0,27 122 32,94

BUY NODE11 LOW AVERAGE 0,22 148 32,56 154,18

HIGH MEDIUM 0,28 169 47,32

HIGH 0,22 188 41,36

LOW 0,27 116 31,32

LEASE NODE 12 LOW AVERAE 0,22 150 33 149

HIGH MEDIUM 0,28 161 45,08

HIGH 0,22 180 39,6

LOW 0,27 119 32,13

LEASING NODE 13 LOW AVERAGE 0,22 148 32,56 151,71

HIGH MEDIUM 0,28 167 46,76

HIGH 0,22 183 40,26

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 THEORY OF DECISIONS

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

Answer:
By definition:
VEIP=¿ VEcIP−VEsIP∨¿
So:
VEIP=194.14−157.95315=36.18
D. What is the efficiency of the information?
Answer
By definition:
36,18
E= ∗100=2010
1,8
With this, the conclusion is viable.
Problem 2. Decision in uncertainty:
The company is thinking of acquiring machinery with new technology to carry out
its workshop work. The purchase will be decided according to several alternatives
presented by the seller (adaptability), this to facilitate the implementation in the
workshop. The decision variables presented below represent the cost of adaptation
that will arise after acquiring machinery and training workers in their use. Table 11
shows the costs in millions of currency units per technology.

Event
Fits
Alternative Doesn't fit Fits Fits well
acceptable
successfully
Technology 1 780 810 818 860
Technology 2 880 820 855 820
Technology 3 830 875 878 900
Technology 4 630 872 812 910

Determine the optimal size of the premises to be purchased using the methods of
LAPLACE, WALD, HURWICZ and SAVAGE. Hurwicz Alpha 0.70.
Solution

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 THEORY OF DECISIONS

LAPLACE

Does
Fits Fits Fits
Alternative not Probability Expected
acceptably successfully well
fit profit
Technology
1 780 810 818 860 0,25 817
Technology
2 880 820 855 820 0,25 843,75
Technology
3 830 875 878 900 0,25 870,75
Technology
4 630 872 812 910 0,25 806

Wald or pessimistic

Fits
Does not Fits
Alternative acceptabl Fits well Expected
fit successfully
y profit
Technology
1 780 810 818 860 780
Technology
2 880 820 855 820 820
Technology
3 830 875 878 900 830
Technology
4 630 872 812 910 630

Optimistic

Fits
Does not Fits
Alternative acceptabl Fits well Expected
fit successfully
y profit
Technology
1 780 810 818 860 860
Technology
2 880 820 855 820 880
Technology
3 830 875 878 900 900
Technology
4 630 872 812 910 910

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 THEORY OF DECISIONS

α 0,7
Hurwicz
1-α 0,3
Fits Fits
Does Fits maxim minimu Expecte
Alternative accept successfull
not fit well um m d profit
ably y
Technology 1 780 810 818 860 860 780 836
Technology 2 880 820 855 820 880 820 862
Technology 3 830 875 878 900 900 830 879
Technology 4 630 872 812 910 910 630 826

Savage

Does not Fits Fits

Alternative Fits well
fit acceptably successfully

Technology 1 780 810 818 860

Technology 2 880 820 855 820
Technology 3 830 875 878 900
Technology 4 630 872 812 910
Maximum 880 875 878 910

Fits
Fits
Alternative Does not fit successfull Fits well Maximum
acceptably
y
Technology 1 100 65 60 50 100
Technology 2 0 55 23 90 90
Technology 3 50 0 0 10 50
Technology 4 250 3 66 0 250

Problem 3. Decision in uncertainty:

PLAYER B
81 83 93 78 84
PLAYER TO

81 78 85 85 85
81 92 80 87 83
91 83 85 93 83
87 89 88 79 88

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 THEORY OF DECISIONS

Find the saddle point of the data given below in table 12 for players A and B.
Solution

  PLAYER B min-max
81 83 93 78 84 78
PLAYER A

81 78 85 85 85 78
81 92 80 87 83 80
91 83 85 93 83 83
87 89 88 79 88 79
max-min 91 92 93 93 88  
There is no saddle point.

Problem 4. Decision in uncertainty:

In order to determine the conditions of decision in the market, the theory of games
will be used, using the graphical solution of the type (2 x N) and (2 x M) to estimate
the strategy and the value of the game for the following data:

PLAYER 2
ESTRATEGY
To B
PLAYER

I 93 97
Ii 88 86
1

Iii 78 87
Solution
The graphical solutions are used in games where one of the players has only two
strategies.
We have to find the expected value:
Ei ( ( x ,1− x ) , B i) =gi 1 x + gi 2 ( 1−x )=( gi 1−gi 2 ) x+ g i 2

The solution is:

X ¿ =( x ¿1 , x ¿2 ) =( x ,1−x)

Where:

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 THEORY OF DECISIONS

( )
∑ x j=1
j=1
0 ≤ x j≤ 1

Searching the expected value:

E1=x ( 93 ) + ( 1−x ) 97=−4 x+ 97

E2= x ( 88 ) + ( 1−x ) 86=2 x +86

E3 =x ( 78 ) + ( 1−x ) 87=−9 x+ 87

There are three lines:

y 1=−4 x+ 97
y 2=2 x+ 86
y 3=−9 x +87
Evaluating in zero:
f =−4 ( 0 ) +97=97
g=2 ( 0 )+ 86=86
h=−9 ( 0 ) +87=87
Evaluating in one:
f =−4 ( 1 ) +97=93
g=2 ( 1 ) +86=88
h=−9 ( 1 ) +87=78
Obtaining:
f g h
1 93 88 78
0 97 86 87

The graph is:

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 THEORY OF DECISIONS

The value of the game is the minimum in the maximum gain of J1. The solution is
the correspondence to the green line.
Problem 5. The problem of Markov's decision:
An insurance company charges its customers according to their accident history. If
you have not had accidents, the last two years will be charged US $6000 (state 1);
If you have had an accident in each of the last two years, you will be charged
$6300 (state 2). If you had accidents the first of the last two years, US $5800 (state
3). The probabilities of the state according to historical data of three years are:

STATES E1 E2 E3
E1 0.25 0.35 0.40
E2 0.28 0.42 0.30
E3 0.20 0.15 0.65

Determine the average payment that the company will receive according to the
table data.
Solution

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 THEORY OF DECISIONS

Problem 6. The problem of Markov's decision:

Suppose you get 6 types of jeans brands in the Colombian market: Brand 1, Brand
2, Brand 3, Brand 4, Mark 5 and Mark 6. The following table shows the odds that
you will continue to use the same brand or change it.
BRAND BRAND BRAND BRAND BRAND BRAND
STATE 1 2 3 4 5 6
BRAND 1 0.16 0.13 0.17 0.15 0.21 0.18
BRAND 2 0.17 0.21 0.17 0.14 0.16 0.15
BRAND 3 0.2 0.21 0.19 0.15 0.13 0.12
BRAND 4 0.13 0.2 0.19 0.2 0.13 0.15
BRAND 5 0.18 0.14 0.13 0.17 0.17 0.21
BRAND 6 0.13 0.22 0.2 0.22 0.19 0.04

At present, the brand has the following percentages in market share respectively
(19%, 18%, 17%, 15%, 19% and 12%) During Week 4.
Solution:
The transition matrix is:
BRAND BRAND BRAND BRAND BRAND BRAND
STATE 1 2 3 4 5 6
BRAND 1 0,16 0,13 0,17 0,15 0,21 0,18
BRAND 2 0,17 0,21 0,17 0,14 0,16 0,15
BRAND 3 0,2 0,21 0,19 0,15 0,13 0,12

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 THEORY OF DECISIONS

BRAND 4 0,13 0,2 0,19 0,2 0,13 0,15

BRAND 5 0,18 0,14 0,13 0,17 0,17 0,21
BRAND 6 0,13 0,22 0,2 0,22 0,19 0,04

Multiplying 3 times the transition matrix we obtain:

  BRAND 1 BRAND 2 BRAND 3 BRAND 4 BRAND 5 BRAND 6

0,1852726 0,1746656 0,1700045 0,1637454
BRAND 1 0,1626849 4 3 2 8 0,14362683
0,1626966 0,1852490 0,1746511 0,1699900 0,1637596
BRAND 2 6 7 2 6 2 0,14365347
0,1627082 0,1852353 0,1746401 0,1699763 0,1637533
BRAND 3 4 8 9 8 4 0,14368647
0,1627088 0,1852716 0,1746648 0,1699631 0,1637623
BRAND 4 3 3 1 7 6 0,1436292
0,1626656 0,1852916 0,1746885 0,1700150 0,1637696
BRAND 5 4 1 9 2 4 0,1435695
0,1627703 0,1852291 0,1746004 0,1636573
BRAND 6 4 6 7 0,1699069 7 0,14383576

Concluding

Multiplying P4 by the initial state vector we obtain

BRAND 1 BRAND 2 BRAND 3 BRAND 4 BRAND 5 BRAND 6

0,1626953 0,1852626 0,169987 0,1637531
5 3 0,1746594 7 5 0,14364177
CONCLUSIONS

 With the previous work it was possible to put into practice the knowledge
related to the theory of decisions, as well as, of the Markov chains theory
and the graphic resolution of these problems

 The theory of decisions is essential to open the way to understanding and

knowledge in an environment, knowing what will be the best option when
deciding on an important event in our financial or business life

 The Excel solver application demonstrates the practicality of the program

when solving this type of complex exercises, establishing the difference

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 THEORY OF DECISIONS

between the human mind and the assertiveness of the software available to
help us solve problems.

 Through the exercises developed, we advance and consolidate our

knowledge among the decision theory where each one can choose that
action, within a set of possible actions leading thus to the best result found,
given his preference, this allows to satisfy the criteria basic acquired of a
logical consistency.

 Markov processes are based on conditional probability and on statistics that

can be handled in two ways. By means of a separate argument and the
most important one that is put into practice, is the use of the Markov
assumption. Thanks to these processes the previous work can be
developed, in order to provide all the knowledge acquired about the course.

REFERENCES

 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=234098&lang=es&site=eds-live

 Joyce, J. (1999). The Foundations of Causal Decision Theory. Camdridge,

UK: Cambridge University Press Editorial. Available in the knowledge
environment of the course. Retrieved from

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 THEORY OF DECISIONS

 http://bibliotecavirtual.unad.edu.co:2051/login.aspx?
direct=true&db=nlebk&AN=228167&lang=es&site=eds-live

 Prisner, E. (2014). Game Theory. Washington, District of Columbia, USA:

Mathematical Association of America Editorial. Available in the knowledge
environment of the course. Retrieved from
 http://bibliotecavirtual.unad.edu.co:2051/login.aspx?
direct=true&db=nlebk&AN=800654&lang=es&site=eds-live

 Ibe, O. (2013). Markov Processes for Stochastic Modeling: Massachusetts,

USA: University of Massachusetts Editorial. Available in the knowledge
environment of the course.
http://bibliotecavirtual.unad.edu.co:2051/login.aspx?
direct=true&db=nlebk&AN=516132&lang=es&site=eds-live

 Dynkin, E. (1982). Markov Processes and Related Problems of

Analysis:Oxford, UK: Mathematical Institute Editorial. Retrieved
from http://bibliotecavirtual.unad.edu.co:2048/login?
url=http://search.ebscohost.com/login.aspx?
direct=true&db=e000xww&AN=552478&lang=es&site=ehost-live

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