QUANTI

TATI
VETECHNI
QUESFORMANAGERS[
KMBN-
206]

UNI
T1
Oper
ati
onResear
ch-

Thet erm Oper ati

onsResear ch,wasf i
rstcoi nedi n1940byMcCl oskyandTr ef t
hen
i
nasmal ltown, Bowdsay ,oftheUni tedKi ngdom.I tisdi f
fi
cul tt
omar kthe‘begi nni
ng’ ofthe
Oper ati
onsResear ch/ManagementSci ence.TheconceptofOper ati
onsResear chwasbor n
duringt heSecondWor ldWarwhent heBr it
ishmi li
tarymanagementcal leduponagr oupof
scienti
stt o exami net hest r
ategiesand t acticsofv ari
ousmi li
taryoper ationswi tht he
i
ntent i
onofef ficiental l
ocationofscar er esour cesf ort hewaref fort.In1948, anOper at i
ons
Resear chcl ubwasf ormedi nEngl andwhi chl aterchangedi tsnamet ot heOper at i
ons
Resear chSoci etyofU. K.Itsjournals,ORQuar terl
y,Fi rstappear edi n1950.TheOper at i
ons
Resear ch Soci etyofAmer i
ca (ORSA)wasf ounded i n 1952 and i tsjour nal,Oper ati
on
Resear chwasf i
rstpubl ishedin1953.
Thi snewappr oacht osy stemat i
candsci ent i
fi
cst udyoft heoper ationsoft hesy stem was
call
edt heOper ationsResear chorOper ati
onal Resear ch( abbr evi
atedasOR) .
Theappar entsuccessofORi nthemi l
it
ary,at t
ractedt heat tenti
onofi ndustri
almanagement
i
nt henew f ield.Af t
ert hewar ,manyoft hesci enti
st swer emot ivatedt opur suer esearch
rel
ev antt of i
el dsofi ndustry,businessandgov ernment alor ganizati
ons.Akeyper soni nthe
postwardev elopmentofOR was Geor ge B.Dant zigi n 1947,he dev el
oped l i
near
programmi ngandi t ssoluti
onmet hodknownasSi mpl exMet hod.

OPERATI ONSRESEARCHI NINDIA

InIndia,Oper ati
onsResear chcamei ntoexi stencei n1949wi t
htheopeni ngofanORuni tat
theRegi onalResear chLaboratoryatHy derabad.Att hesamet ime,anothergr oupwasset up
i
nt heDef enceSci enceLabor ator
y,whichdev oteditsel ftotheprobl
emsofst ores,Purchase
andpl anning.
In1953,anOR uni twasest abl
ishedi nt heI ndianSt ati
sti
calInsti
tute,Cal cutta,forthe
applicati
onofORmet hodsi nnationalplanningandsur v
ey.ORsoci etyofI ndiawasf or
med
i
n1957.I tbecomesamemberoft heInternat i
onalFeder ati
onofORsoci eti
esi n1959.The
fi
rstconf erenceofORsoci et
yofIndiawashel di nDel hi i
n1959
Towar ds t he appl i
cati
on ofOR i nI ndia,Pr of .Mahal onobis made t he firsti mport
ant
applicati
on.Hef ormulatedt heSecondFi veYearPl anwi ththehelpofORt echni
quet o
forecastt het rendofdemand,av ai
labil
ityofr ecour sesandf orschedul i
ngt hecompl ex
schemenecessar yf ordevelopingourcount r
y ’
seconomy .Itwasest i
mat edt hatIndiacould
becomesel fsuff
icienti
nf oodmer elybyr educingt hewast ageoffoodby15%.

Whati sOper ati

onsResear ch?
•Operationsresear ch(abbr evi
atedasORher eafter)isasci entifi
cmet hodofpr ovi
ding
executivedepar t
ment swi thaquant itati
v ebasisfordeci sionsregar dingt heoperat
ions
undertheircont r
ol:Mor seandKi mbal( 1944)
•ORi sananal yti
cal met hodofpr oblem- solvi
nganddeci sion-maki ngt hatisusefulinthe
managementofor ganizations.I
noper ationsresearch, problemsar ebr okendowni ntobasi
c
component sandt hensol vedindef i
nedst epsbymat hemat icalanaly si
s.
•OperationalResear ch( OR)istheuseofadv ancedanal yti
cal t
echni quest oimprove
decisi
onmaki ng.Itissomet i
mesknownasOper ationsResear ch,ManagementSci enceor
Industr
ialEngineering.Peopl ewithski l
lsinORhol djobsi ndeci si
onsuppor t,busi
ness
analyt
ics,mar keti
nganal y
sisandl ogisticsplanni
ng–aswel lasjobswi t
hORi nthet i
tl
e.
Def
ini
ti
onofOPERATI ONSRESEARCH
1)Accor ding t o Oper ati
ons Resear ch Society
,Amer i
ca-“ Oper
ati
ons Research is
concer nedwi thsci enti
f i
callydeci
dinghowt obestdesignandoper ateman-
machi ne
systemsusual l
yr equiringt heall
ocat i
onofscareresources.
”
2)Accor dingt oH.M.Wagner -“OperationsResearchisascienti
fi
capproachtoproblem-
solvi
ngf orexecutivemanagement .”
3)Accor dingt oAutherCl arck-“OperationsResearchistheartofwinningwarswithout
actuallyfighti
ngt hem. ”
4) Accor dingt oT. L.Saat y-“Operati
onsResear chist heartofgivi
ngbadanswer st o
problemst owhichot herwisewor seanswerar egiven.”

MainChar act eri

sticsorf eat uresofOper ationsResear ch?
1.I
nter-
disciplinaryt eam appr oach:InOR, tomodel apr oblem, peopleorexper tsfr
om
var
iousdiscipl i
nesar ejoined.E.gComput erexper t
,Economi sts,
mat hematicianscanjointo
model aeconomi cspr oblem
2.Wholist
icappr oacht othesy stem:ORmodel shav etot hi
nkt hewhol ebusinessnotf ort
he
part
icul
aruni tforwhi chitisengaged.I twillseet heef f
ectoft hemodel i
nent i
rebusiness.
3.UsingORt echni ques: wecanonl yi
mpr ov ethesol uti
onsoft heexi t
ingproblemsbutcan
notmaket hem per fectduet omanyot herfactorsaf f
ect i
ngsol ut
ions
4.Useofsci ent i
ficresear cht oapplythest ateofar ttechniquest oimprovesol uti
ons
5.Totaloutputi sopt imizedbymaxi mizingormi nimizingout put

Charact
eristicsofOper at
ionsResearch
1)Deci si
onMaki ngAppr oach
2)Scientifi
cAppr oach
3)ObjectOr i
ent
edAppr oach
4) I
nter -
disci
pli
naryTeam Approach

Appl
icati
onofOper ati
onsResear
ch
1)I nDefence
2)I nindustry
3)I nFinance
4)I nMar keti
ng
5)I nInsuranceSector
6)I nProductionManagement
7)Per sonal management
8)Resear chanddevel
opment

ScopesofOR
1.Agri
cult
ure:opti
mum al l
ocat
ionofl and,crops,ir
ri
gati
onet c
2.Finance:maximizeincome,profi
t,mi nimizecostetc
3.Inindust
ries:
Allocat
ionofresources, assignmentofproblemstowor t
hyempl oy
eesetc
4.Personalmanagement :Toappointbestcandi dat
e,decideminimum employeesto
compl et
ejobetc
5.Producti
onmanagement :Deter
mi nenumberofuni t
st oproducetomaximizeprofi
t,et
c

Adv
ant
agesofORinDeci
sionMaki
ng
1)Bet
terCont
rol
 2)Bet
terCo-ordinat
ion
3)Bet
terDecisions
4)Bet
terSystems

Techni
quesofOper ati
onsResear
ch/Model
sofOper
ati
onsResear
ch
1)All
ocat i
onModel s
2)I
nvent oryModels
3)Waitingline(Queui
ng)Models
4)Compet iti
ve(GameTheory)Model
s
5)Networ kModel s
6)Sequenci ngModels
7)ReplacementModel s
8)Mont eCar l
oTechnique

MethodologyofOper ati
onsResear ch
Thefol
lowingi sthemethodologypr ocessoftheoper
ati
onsr
esear
char
e-
1)For mul ati
onofthePr obl
em
2)Const ruct
ionofaMat hemat i
cal model
3)Der iv i
ngthesolut
ionfrom themodel
4)Val idityofthemodel
5)Est abl i
shi
ngcontrolovertheSol ut
ion
6)I mpl ementati
onofthef i
nalresults

Li
mit
ati
onsofOper
ati
ons 
Resear
ch

1.Thesedonott
akei
ntoaccountqual
i
tat
iveandemot
ional
fact
ors.

2.Theseareappli
cabletoonl yspeci
fi
ccategoriesofdecision-
makingpr
oblems.
3.Thesearerequi
redt obeinterpr
etedcorrect
ly.
4.Duetoconv ent
ionalthi
nking,changesfacelotofresistancefr
om workersandsome¬t
imes
evenfr
om empl oyer
.
5.Modelsareonlyideali
zedrepresentat
ionofreali
tyandnotber egar
dedasabsolut
e.

DECI
SIONTHEORY

Deci siont heorywhi chi sdefinedast hepr ocessofl ogicalandquant i

tati
veanal y sisof
allfact orst hatinfluencest hedeci sionpr obl em, assistthedeci si
on-makerinanaly zi
ngt hese
probl emswi thsev eral cour sesofact ionandconsequences.
Deci siont heorymaybedef i
nedas“ apr ocesswhi chr esultsint heselecti
on,from asetof
alternat i
ve cour ses ofact i
on,the cour se ofact ion whi ch is considered to be mor e
sat i
sfact or ythanot her sorbestt omeett heobj ectivesoft hedeci sion-
probl
em, asj udgedby
thedeci sionmaker .
”
Element si nDeci sionMaki ng
1)Cour sesofact ion-A deci sioni smadef rom amongasetofdef inedal ternat i
ves
cour sesofact ion.Thesear eal socal ledact i
ons,act sorst r
ategi
esar eundercont rol
andknownt othedeci sionmaker .
2)St at eofNat ure-Ev ent sofanycour seofact ionar edependentuponcer tainf actor s
bey ondt hecont roloft hedeci sion-maker .
3)Payof f-Ifitispossi bl
et oquant i
fyeachout come,t hem foreachcour seofact ion
chosenbyt hedeci sionmaker ,aknownpay of fwillresultthatisconditi
onalonwhi ch
 st
ateofnat
ure.

DECISIONMAKI NGENVI ORNMENT

Deci
siontheorypr
ovidesar at
ionalappr
oacht odet
erminetheopti
mum st
rategi
eswherea
deci
sionmakeri sfacedwi thseveraldeci
sionalt
ernati
ves.Ther
ear
edi f
ferentt
ypesof
deci
sionenvi
ronmentasf ol
l
ows-

1)Decisi
on-Maki
ngundercer t
aint
y:I
nthi
senv i
ronment,t
hedeci
sionmakerknowswi t
h
cer
taint
ytheoutcomer esul
tingfr
om theselect
ionofaparti
cularcourseofact
ion.
Forbett
erunder
standi
ngoft hemethodconsi
dert hef
oll
owi
ngexampl es.

Example1:Af armerwant stodecidewhi chcropsheshoul dplantonhi

s100acr ef ar
m.The
profi
tfrom eachi sdependentont her ainf
allduringt hegrowingseason.Thef armerhas
categor
izedtheamountofr ainf
allashigh, medium andl ow.Hisesti
matedprofi
tf oreachi
s
showni nthetablebelow:
Esti
matedCondi ti
onalPr of
it
s(Rs.)
Rainfal
l
CropA CropB CropC
High 6000 3500 5000
Medi um 4500 4500 5000
Low 3000 5000 2000
Ifthefarmerwi shestoplantonlyonecr op,decidewhi chshouldbehisbestcrop,ifheknow
withcertai
ntythattherai
nfallwi
llbe(a)high,(b)medi um or(c)low?

Soluti
on1:( a)Whent herainfallishigh, t
hepr ofi
t,f
rom CropAi sRs.6000,fr
om copBi sRs.
3500andcr opCi sRs.5000.Outoft hese,Rs.6000i sthehighestprof
itfr
om cr
opA.Hence
i
fthef ar
merknowswi t
hcer t
aintythatt herainfal
lwi l
lbehigh,
hewi l
lbedecidet
opl antCrop
A,togethi ghestest
imatedpr ofitofRs.6000.
b)I ft
hef armerknowswi t
hcer tai
ntyt hattherainfal
lwil
lbemedi um,hewi l
lbedecidingto
pl
antCr opC, togethighestestimat edpr ofi
tofRs.5000.
c)Ifthef armerknowswi t
hcer t
aintythatther ainfal
lwil
lbel ow,hewi l
lbedecidetoplant
CropB, togethighestesti
mat edpr ofitofRs.5000.

2)Deci sion- Maki ngunderuncer tainty:Int hisenv ir

onment ,thedecisionmakerl ackst he
suffi
cientknowl edget oallowhi mt oassesst hepr obabili
ti
est ot
hev ariousstateofnat ure
associatedwi theachdeci sion.Her et hesomedeci sionr ul
es(met hods)f ormaki nga
decisi
onundersuchsi t
uationofuncer tai
nty -
i
)Cr i
terionofPessi mi sm (Maxi mi norMi nimax)
i
i)Crit
er i
onofOpt imi sm (Maxi maxorMni mi n)
i
ii)Hurwi czCr i
ter i
on( Crit
erionofReal ism)
i
v )LaplaceCr i
terion
v)Mni maxRegr etCr iteri
on( Sav ageCr i
teri
on)
(i
)Cr i
ter i
onofPessi mism ( Maxi mi norMi nimaxCr it
erion)-Whent hedeci sionmakeri s
deali
ngwi thpay -off( profi
t),maxi mincr i
ter i
on( maximum oft heminimum)wi llbeused.I n
thiscrit
er ionwor stpossi bleout come( mini mum)i neachcour seofact i
oni sidenti
fiedand
thenthemaxi mum oft hesemi ni mum out comesi ssel ectedwhichcor respondt othebest
strat
egyf orthedeci sionmaker .
Whent hedeci si onmakeri sdeal i
ngwi t
hcost s,(l
osses)mi nimaxcriterionwillbeused,i n
thiscrit
er iondeci si
onmakersel ectmaxi mum i neachcour seofact iont henmi nimum of
thesemax imum out comesi ssel ectedwhi chcor respondt othebestfordeci si
onmaker .
Exampl e2:Consi dert hepr oblem gi veni nEx.1anddet erminethebestcr op,thef armer
shoul
dpl
ant
,byusingthecri
ter
ionofPessimism.(maximincri
ter
ion)
.
Profi
ts(Rs.)
,Underrai
nfal
l
Al
ternati
ve
High Medium Low
Cr
opA 6000 4500 3000
Cr
opB 3500 4500 5000
Cr
opC 5000 5000 2000

Sol
uti
on2:Theprofi
tsofcr
opsandmaxi mincri
teri
onaregiv
eni
nthefoll
owi
ngtabl
e-
Prof
it
s(Rs.)
,Underrai
nfal
l Mini
mum
Al
ternat
ive
High Medium Low Prof
it
CropA 6000 4500 3000 3000
CropB 3500 4500 5000 3500(Max)
CropC 5000 5000 2000 2000

Heremaxi
mum ofthemini
mum payof
fisRs.3500,
whi
chcor
respondt
oal
ter
nat
iveCr
op.
Hence,
thefar
mershoul
dplantCr
opB.

Example3:From t
hef
oll
owi
ngpayof
ftabl
efi
ndt
hebestal
ter
nat
iveusi
ngPessi
mism
cri
ter
ion.(
mini
max)

St
ateofNat
ure
Al
ter
nat
ive
S1 S2 S3 S4
A1 1 3 8 5
A2 2 5 4 7
A3 4 6 6 3
A4 6 8 3 5

Sol
uti
on3:
St
ateofNatur
e
Al
ter
nat
ive Maxi
mum
S1 S2 S3 S4
A1 1 3 8 5 8
A2 2 5 4 7 7
A3 4 6 6 3 6(Mi
n)
A4 6 8 3 5 8

Si
ncemini
mum v al
ueoft
hemaximum pay
offis6.Whichi
scorrespondi
ngtotheact(
A3)
?
Hencet
hedeci
sion-
makersel
ect
sA3asthebestactusi
ngmini
maxcr i
ter
ion.

(i
i)Crit
eri
onofOpt i
mism (MaximaxandMni mi n)
-Thiscriterionisopposi t
et othecri
teri
on
ofPessi mi
sm.I tisbasedupont heopt i
misti
cappr oachofassumpt i
ont hatsomet hi
ng
betteri
sgoingtohappen.
Whent hedecision-makerisdeali
ngwi th( pr
ofit
)payoffmaxi maxcr i
ter
ion( maximum ofthe
maxi mum)maybeusedt oselectopt i
malst rat
egy.I nt hiscr i
ter
ionmaxi mum possi bl
e
outcomei neachcour seofactioni sidentif
iedandt hent hemaxi mum oft hemaxi mum
outcomesisselectedwhi chiscorrespondt othebeststrategyf orthedecisionmaker.
Whent hedecision-makerisdeal ingwi th(cost)pay off
,mi nimincriter
ion( mini
mum of
minimum)maybeusedt oselectopt i
mal str
ategy(al
ternati
v e).

Exampl
e4:Consi
dert
hepr
obl
em gi
veni
nEx.2anddet
ermi
net
hebestcr
op,t
hef
armer
shoul
dpl
ant
,byusingthecri
ter
ionofOpt
imism.(Maximaxcrit
eri
on).
Prof
it
s(Rs.
),Underrai
nfal
l
Al
ternati
ve
High Medium Low
Cr
opA 6000 4500 3000
Cr
opB 3500 4500 5000
Cr
opC 5000 5000 2000

Sol
ution4:Theprofi
tsofcr
opsandmaxi maxcrit
eri
onaregiveninthefol
lowi
ngtable-
Prof
it
s( Rs.),
Underrai
nfal
l Maximum
Alt
ernat
ive
High Medium Low Prof
it
CropA 6000 4500 3000 6000(max)
CropB 3500 4500 5000 5000
CropC 5000 5000 2000 5000
Heremax i
mum ofthemaximum pay offisRs.6000,
whichcorrespondtoalt
ernat
iveCrop.
Hence,thefar
mershouldpl
antCropA.

Example5:Fr om thefol
l
owingpayofftabl
efi
ndt
hebestal
ter
nati
veusi
ngOpt
imi
sm
cri
ter
ion.(
mini
mi n)
Stat
eofNat
ure
Alt
ernat
ive
S1 S2 S3 S4
A1 1 3 8 5
A2 2 5 4 7
A3 4 6 6 3
A4 6 8 3 5

Sol
uti
on5:
St
ateofNatur
e
Al
ter
nat
ive Mi ni
mum
S1 S2 S3 S4
A1 1 3 8 5 1( min)
A2 2 5 4 7 2
A3 4 6 6 3 3
A4 6 8 3 5 3
Sincemini
mum val
ueoftheminimum pay
offis1.Whichiscorr
espondingtot
heact(
A1)
?
Hencet
hedeci
sion-
makersel
ectsA1asthebestactusi
ngminimincri
teri
on.

(i
ii
)Hurwi czCriter
ion( Cri
terionofReal i
sm) -Itisalsoknownaswei ght
edav eragecri
ter
ion.
Itis based on Hur wicz’s conceptofcoef f
ici
entofopt imism (orpessi mism).Iti s
compromi sebet weent hecr iter
ionofopt imism (maximax)andt hecri
ter
ionofpessi mism
(maximin).Inthiscriteri
ont hedeci sion-makercanmakebal ancebetweent hemaximum
andmi nimum f oreachal ternati
v ebywei ghti
ngt hem accordingtohisdegr eeofoptimism
andpessimi sm.Coef fi
cientisdenot edbyα.Thi scoeffi
cientli
esbetween0t o1,where0i s
repr
esentingacompl et epessi misti
cat t
it
udeaboutt hefutur
eand1i srepresentacompl ete
opti
misticat t
it
udeaboutt hef uture.Ifαi st hecoef f
icientofopt i
mism,t hen( 1-
α)wi l
l
repr
esentt hecoeffi
cientofpessi mism.

Example6:Det
erminethebestcr
op,thatt
hef
armershoul
dpl
ant
,byusi
ngHur
wiczcr
it
eri
on,
thef
armer’
sdegreeofopti
mism bei
ng0.6.

Al
ter
nat
ive Pr
ofi
ts(
in100Rs.
),Underr
ainf
all
 Hi
gh Medi
um Low
Cr
opA 60 45 30
Cr
opB 35 45 50
Cr
opC 50 50 20

Sol
uti
on6:
H=α*(
i)
+(1-
Pr
ofi
ts(
in100Rs.
) Pr
ofi
t
Al
ter
nat
ive α)
*(i
i
)
High Medi
um Low Max( i
) Mi n(
ii
) α=0.6
CropA 60 45 30 60 30 48
CropB 35 45 50 50 35 44
CropC 50 50 20 50 20 38
Si
ncemaxi
mum v
alueofHis48(
in100Rs.
)i.
e.Rs.4800whichcorr
espondtoCr
opA.

Exampl e7:Fr om thefol

lowi ngpayofftablefindt
hebestal t
ernativ
eusi ngHur wiczcrit
eri
on.
Degreeofopt i
mi sm is0.
5.
Costs(i
n100Rs. )
Alter
nat i
v e
S1 S2 S3 S4
A1 12 27 7 20
A2 9 25 10 10
A3 20 23 23 14
A4 24 17 32 21
Soluti
on7:
Cost s(i
n100Rs. ) Cost H=α* (i
)+(1-α)
*(i
i)
Alt
er nat
ive
S1 S2 S3 S4 Max Mi n α=0. 5
A1 12 27 7 20 27 7 17
A2 9 25 10 10 25 9 17
A3 20 23 23 14 23 14 18.5
A4 24 17 32 21 32 17 24.5
Herecost sar egi venint het abl
e,so weshal lselecttheal ternati
vecor respondingto
minimum v al
ueofH.
Si
ncet hemi nimum v alueofH i s17 (in 100 Rs.
)i .
e.Rs.1700 whi ch correspond t
o
al
ternati
vesA1andA2bot h.

(i
v)Lapl ace Cri
teri
on:This cri
ter
ion is based on t he pr
inci
ple ofequalli
keli
hood or
i
nsuffi
cientreason.I
fther
ear eneventscor respondingtoeachalter
nati
vetheprobabi
li
tyof
eacheventi stakenas1/ n.Usi
ngt hesepr obabil
it
ychooseanal ternat
ivewi
ththehighest
expect
edpr ofi
torthelowestexpectedloss( cost
).

Example8:Considertheprobl
em giveninEx.2anddet ermi
net
hebestcr
op,t
hef
armer
shoul
dplant
,byusingthecri
ter
ionofLapl
ace.
Profi
ts(
Rs.)
,Underrai
nfal
l
Al
ternati
ve
High Medium Low
Cr
opA 6000 4500 3000
Cr
opB 3500 4500 5000
Cr
opC 5000 5000 2000
Soluti
on8:Theev ent sHi gh,Medium andl ow rainsareequal
lyl
ikel
y.Theassoci
ated
probabil
it
yt oeachev entistakenas1/ 3-
E(A)=Ex pectedpay offvalueforalt
ernat
iveA
=( 6000+4500+3000)*( 1/3)=13500/3=4500( Max)
E(B)=Expect edpay offvalueforalt
ernat
iveB
=( 3500+4500+5000)*( 1/3)=13000/3=4333. 33
E(C)=Ex pectedpay offvalueforalt
ernat
iveC
=(5000+5000+2000)*1/ 3=12000/3=4000
Maximum expect edv al
uei sE( A)=4500,correspondingtoal
ter
nat
ivecropA.Hencethe
farmershoul dplantcr opA.

(i
v)Mni maxRegretCri
ter
ion(SavageCrit
eri
on)-Thisdecisi
oncr i
teri
onwasdev el
opedby
L.
J.Sav age.Thi
sisbasedont heconceptofregret(opport
unityl
oss)experi
encedbythe
deci
sion-makeraft
eradecisi
oni smadebyhi m.Thedeci sion-
makershouldat t
emptto
mini
mi zeregr
etbef
oreact
uall
ytaki
ngdecisi
onofselecti
ngapar ti
cularst
rat
egy.

Example9:Considertheprobl
em giv
eni nEx.2anddet er
minet hebestcr
op,t
hef
armer
shoul
dplant
,byusingtheMini
maxRegr etCr
it
eri
on(Savagecri
ter
ion)
Profi
ts(
inRs100)
Al
ternati
ve
High Medium Low
Cr
opA 60 45 30
Cr
opB 35 45 50
Cr
opC 50 50 20

Sol
uti
on9:
Regr
et
Pr
ofi
ts(
inRs100)
Al
ter
nat
ive Amount
Hi
gh Medi
um Low H M L MaxRegret
Cr
opA 60 45 30 0 5 20 20(
Min)
Cr
opB 35 45 50 25 5 0 25
Cr
opC 50 50 20 10 0 30 30
Maxi
mum 60 50 50

Si
ncemini
mum oft
hemaximum r
egr
etsi
sRs.2000whi
chcor
respondt
oal
ter
nat
ivecr
opA.
Hencet
hefar
mershoul
dchooset
opl
antCropA.

3.DecisionMaki ngUnderRi sk:Iti

sapr obabi
li
sti
cdecisi
onsi
tuat
ion,inthi
senv i
ronment
mor ethanonest ateofnatureex i
stsandt hedecisi
on-
makerhassuf f
ici
entinfor
mationto
assignpr obabi
l
iti
estoeachst ateofnature.Ther
ear et
womostpopul ardeci
sioncrit
eri
ons
forevaluati
ngthealter
nat
ivesare-
a)Expect edMonetaryVal
ue( EMV)Cr i
teri
on
b)Expect edOpportuni
tyl
oss( EOL)Cri
teri
on

A)Expect edMonet ar
yValue(EMV) :Whent heprobabil
it
iescanbeassi gntothev ari
ous
st
ateofnat ur
eiti
spossibl
etocalculat
et hestat
isti
calexpectati
onofgai nforeachcourse
ofact i
on.Thecondi t
ionalval
ueofeachev entint othepay offtablei smulti
plyi
ngby
probabil
it
y.
Ther esul
tingnumberi stheEMV f ortheact .Thedeci sion-
makert henselectfrom the
avail
ablealter
nati
veacti
on.Theacti
ont hatleadtothemaxi mum expectedgainthatisthe
act
ionwi
thhi
ghestEMV.

Example10:Pay of
foft hr
eeactx,y ,zandthestateofnatur
el,m,nar egiveni
nthet
abl
e.
Theprobabil
i
tiesofthestatesofnaturear
e0.3,0.4,0.
3respect
ivel
y.Calcul
atet
heEMVfor
theaboutdataandselectthebestact.
x Y z

l -
20 -
50 200

m 200 -
100 -
50

n 400 600 300

Sol
uti
on10:
  Prob. x y z
l 0.
3 -20 -50 200
Const
ruct
ionofEMV m 0.
4 200 -100 -50 t
abl
e:
n 0.
3 400 600 300
EMVf oreachact
 
x y z
l 0.
3*(-
20)=-6 0.
3*(-
50)=-
15 0.
3*200=60
m 0.
4*200=80 0.
4*(-
100)=-40 0.
4*(-
50)=-
20
n 0.
3*400=120 0.
3**600=180 0.
3*300=90
Tot
al 194(
Max) 125 130

Sincemaxi
mum EMVi s194.Whichi
scorrespondt
otheact(
x)Hencet
hedeci
sion-
maker
sel
ect(
x)asbestactaccor
dingt
oEMVcr i
teri
a.

Exampl
e11:Lett
hestat
eofnat
ureS1andS2hav
ingprobabil
i
ty0.
6and0.
4respect
ivel
y,and
ther
est
rat
egi
esfr
om A1andA2det
ermi
netheopt
imalstrat
egy.

S1 S2

A1 30 35

A2 20 30

Solut
ion11:Expectedpayof fval
ueforA1=30*0.
6+35*
0.4=32(
Max)
ExpectedpayoffvalueforA2=20*0.
6+30*0.
4=24
ExpectedMonetaryValueis32whi chi
scorrespondst
oA1.

B)Expected Oppor t
unityLoss( EOL)Cri
ter
ion:Anal ter
nati
veapproachto maxi mizing
expectedmonetaryv al
ue( EMV)i stomini
mizet heexpectedopport
unit
yLoss( EOL)also
call
edexpectedvalueofr egret
.TheEOLi sdefinedasthedi f
fer
encebetweent hehighest
profi
torpayofff
orast ateofnat ureandt
heactualprofi
tobtai
nedforthepart
icularcourse
ofacti
ontaken.

Exampl
e12:Lett
hest
ateofnat
ureS1andS2hav
ingpr
obabi
l
ity0.
6and0.
4respect
ivel
y,and
t
her
est
rat
egi
esf
rom A1andA2det
ermi
netheopt
imal
str
ategy
.
S1 S2

A1 30 35

A2 20 30

Solut
ion12:ExpectedpayoffvalueforA1=30*0.6+35*0.
4=32
Expectedpayoffvaluef
orA2=20* 0.
6+30*0.4=24(Mini
mum)
Expectedl
owestVal uei
s32whi chiscorrespondstoA2.

Example13:Underanempl oy
mentpr omot i
onprogram i
tispr oposedtoal l
ow sal
eof
newspapersonbusesduri
ngoff-
peakhour.Thevendercanpurchasethepapersataspeci
al
concessi
onalrateof25pai
saandsaleitfor40paisa( api
ece).Anyunsoldcopyisadead
l
oss.Av enderhasest
imat
edthefol
lowi
ngpr obabi
l
iti
esfort
henumberofcopi esdemanded:

No. of 15 16 17 18 19 20
copi
es

Pr
obabi
l
it 0.
04 0.
19 0.
33 0.
26 0.
11 0.
07
y

Prepar
eapay of
ftabl
eandf i
ndouthowmanycopi
esofnewspaper
sshoul
dbeor
der
edby
usi
ngExpect
edOpportuni
tyLoss(
EOL)cr
it
eri
on.

Soluti
on13:Gi venthat,costperpiece=25pai sa,selli
ngpriceperpiece=40pai
sa
Profi
tperpi ece=40-25=15paisa.
Thepay of ftabl
ewi t
hal lalt
ernativ
esandt heev ents(demand)andt hecor
respondi
ng
probabil
i
tiesarecalculatedasfoll
ows-
Condi t
ionalPayofftabletable
S, Possi bl
e stock
Demand Prob. l evel(
Alt
ernati
ves) Maximum
[Event] ii i
ii i v v v
i v ii M
i
15 16 17 18 19 20  
15 0.04 225 200 175 150 125 100 225
16 0.19 225 240 215 190 165 140 240
17 0.33 225 240 255 230 205 180 255
18 0.26 225 240 255 270 245 220 270
19 0.11 225 240 255 270 285 260 285
20 0.07 225 240 255 270 285 300 300

Condit
ionalOppor
tuni
tyLossTabl
e
Prob. S, Possi
blest
ockl
evel
(Al
ter
nat
ives)
Demand[ Event
] i
i i i
i i v v vi vi
i
i
15 16 17 18 19 20
15(E1) 0.
04 0 25 50 75 100 125
16(E2) 0.
19 15 0 25 50 75 100
 17(
E3) 0.
33 30 15 0 25 50 75
18(
E4) 0.
26 45 30 15 0 25 50
19(
E5) 0.
11 60 45 30 15 0 25
20(
E6) 0.
07 75 60 45 30 15 0

EOLf orE1=[( I)*

(1)]
=0.4*0+0.19*15+0.33*30+0.26*45+0.
11*60+0.07*75=36.30
Simil
arlyEOLf oreachev entcanbecalcul
ated.Calcul
ati
onf orEOLf oral
levent
sisshowni
n
thefoll
owingtable:
Conditi
onalOppor t
unityLossTable
pr
ob. S, Possiblest
ockl evel(
Alt
ernati
ves)
Demand[ Event
] i ii ii
i iv v vi vi
i
  15 16 17 18 19 20
15(E1) 0.
04 0 1 2 3 4 5
16(E2) 0.
19 2.85 0 4.75 9. 5 14. 25 19
17(E3) 0.
33 9.9 4.95 0 8.
3 16. 5 24.
75
18(E4) 0.
26 11.7 7. 8 3.9 0 6.
5 13
19(E5) 0.
11 6.6 4.95 3. 3 1.
7 0 2.
75
20(E6) 0.
07 5.25 4. 2 3.15 2. 1 1. 05 0
EOL   36.3 22. 9 17. 1 25 42. 3 64.
5
(Mi n.)

Theminimum EOLis17.10pai
sawhichcor
respondsto17newspaper
sinst
ock.Henceby
EOLcr
iter
ion17newspaperi
stheopt
imalst
ocklevel
.

C)Expect edValueofPer fectInformation( EVPI )

-Decisi
onmaki ngunderrisktheeachstate
ofnat ur
eisassoci atedwit
ht hepr obabi
lit
yi soccurr
encehowev erift
hedecisi
onmakercan
acquireper f
ectinformati
onaboutt heoccur renceofvariousstateofnature,t
henhewi llbe
ablet oselectacour seofact i
ont hatyiel
dt hedesi r
edpay offforwhateverstateofnature
thatactuall
yoccur.
EVPI =expect edpr ofi
twithper fectinformat i
onundercer t
ainty
-expectedpr ofi
twithout
perfecti
nfor mati
on.
EVPI =ΔEV- EMV

Example14:A1,A2 andA3 ar
etheactandS1,S2,andS3 ar
et hestateofnatur
eandt
her
e
probabi
l
iti
esar
e0.5,0.4and0.1eachst
ateofnat
urerespect
ively
.Calcul
ateEMV.

A1 A2 A3

S1(
0.5) 30 25 22

S2(
0.4) 20 35 20

S3(
0.1) 40 30 35

Sol
uti
on14:
Ma
  A1 A2 A3
x
S1(
0.5 3 2 2 30
 ) 0 5 2
S2(
0.4 2 3 2
35
) 0 5 0
S3(
0.1 4 3 3
40
) 0 0 5

EMV-A1=30* 0.
5+20* 0.
4+40*0.
1=27
A2=25*0.
5+35*0.4+30*0.1=29.
5
A3=22*0.
5+20*0.4+35*0.1=22.
5
EMV=29. 5
ΔEV=30* 0.
5+35*0.4+40*0.
1=33
EVPI=ΔEV-EMV
EVPI=33-29.
5
EVPI=3.5
DECI
SIONTREE

A deci siont r
ee isa  decisionsuppor t toolt hatusesat ree- li
ke  graph  or model  
ofdeci si
ons
and t heirpossi ble consequences,i ncludi ng chance  ev entout comes,r esour ce cost s,
and  utili
ty.Itisonewayt odi splayan  algor ithm.
Deci siont reesar ecommonl yusedi n  oper at ionsr esear ch,speci ficallyi n decisionanal ysis,
tohel pi dent i
fyast rategymostl i
kel yt or eachagoal , butar eal soapopul artoolin machi ne
l
ear ning.
Adeci siont r
eei sa  fl
owchar t-l
ikest ruct urei nwhi cheachi nternalnoder epresent sa" t
est "
on an at t
ributeeach br anch r epr esent st he out comeoft het estand each l eafnode
represent sacl assl abel .Thepat hsf r
om r oott oleafr epresentcl assi f
icat ionrules.
In decisionanal ysi s adeci siont reeandt hecl oselyrelat ed  i
nfluencedi agr am  areusedasa
visualand anal y ticaldeci si on suppor tt ool ,wher et he  expect ed v alues ofcompet ing
alternat i
vesar ecal culated.A deci siont reei sagr apht hatusesabr anchingmet hodt o
i
llustrat eev erypossi bleout comeofadeci si on.
Adeci siont reeenabl est hedeci sionmakert oseet hev ariousel ement soft hecompl ex
probl em i npr operandsy stemat icmanner .Iti sagr aphi calr epresent ationoft hedeci sion
processi nvol v
ing v ar i
ousdeci sional t
er nat ivesandsequenceofev ent sasi ft heyar e
branchesofat ree.
Adeci siont reeconsi stsof3t ypesofnodes:
1.Deci sionnodes-commonl yr epr esent edbysquar es
2.Chancenodes-r epresent edbyci rcles
3.Endnodes-r epresent edbyt riangl es
Deci siont reesar ecommonl yusedi n oper at i
onsr esear ch  and  oper ationsmanagement .
Deci sionnodesar et hepoi ntsf rom whi cht heal t
er nat i
v ecour seofact i
on( strategies)
emer gesasmai nbr anchesoft ree.
Att heendofeachdeci sionbr ancht herei sast ateofnat ur enodef rom whi chemanat e
chanceev ent sint hef orm ofsub- br anches.
TheRol l
-backpr ocessi sgener allyusedi ndeci siont ree.I tmeansher ewemov er i
ghtt ol eft.
Theai m oft hisoper ationi stomax imi zet her eturnf r
om t hedeci sionsi tuat i
on.
Stepsi nDeci sionTr eeAnal ysis-
1)Const ructt hedeci siont reer epr esent i
ngal ldecisionpoi nts, possi blecour seofact i
on,
andst ateofnat ure.
2)Ateachdeci sionpoi ntdet ermi net hepr obabi l
ityandt hepay offassoci atedwi t
heach
courseofact ionandshowi nt hedi agr am atappr opr iatepl aces.
 3)St arti
ngf rom theext r
emer i
ghtend, comput et
heEMVf oreachcourseofact i
on.
4)Sel ectt hecour seofact i
ont hatyieldst hebestEMVf oreachdecisionandpr oceed
backwor dtot henextdeci sion.
5)Repeatt hest ep3and4.
6)Sel ectthatcour seofact i
onf rom theext remer i
ghttolef
twhichy i
eldsthemaxi mum
possibleEMVatt hefirstdecisionpoi nt
.
Exampl e15:Acont ractorhasachoi cebet weent wocoursesofacti
on
a)Ar i
skycont ractpr omisingRs.10Lakhswi thaprobabil
it
yof0.6andRs.6Lakhswi tha
probabilit
yof0. 4.
b)Adi versif
iedpor tfol
ioconsi sti
ngoft wocont ract
swi t
hindependentout comeseach
paying5Lakhswi thpr obabili
ty0.6andRs.3Lakhswi t
hapr obabi
li
tyof0.4.
Constructthedeci siontreef orusingEMVcr it
eriawhatistheopti
mal deci
sionbyusingEMV
cri
ter
ia.
Solut
ion15:

(
8.4) 10(
0.6)
E
RI
SKI
CONTRAC
6(
0.4)

D1

Div
ersi
fi
ed 5(
0.6)
port
fol
i
o
E
(
4.2) 3(
0.4)

I
nor dert
oanal
ysest
hist
ree,wefindExpectedMonetaryValue(EMV’
s)f
ort
hechancenode
E1andE2.
EMVofchancenodeE1=Rs.[0.6*
10+0.4*6]=6+2.
4=8. 4lakh.
EMVofchancenodeE2=Rs.[0.6*
5+0.4*3]=3+1.
2=4. 2lakh.
Themaximum EMVisRs.8.4l
akh,al
ongthebranchE1.

Example16:Acompanyownsal easeonacer t
ainproper
ty.I
tmaysel ltheleaseforRs.
12000oritmaydr i
l
lthesaidpropert
yforoi
l.Vari
ouspossi
bledril
l
ingresult
sareasunder
al
ongwi t
ht heprobabi
li
tyofhappeningandr upeeconsequences.Draw adeci si
ontree
di
agram forthegivenprobl
em andcalcul
ateExpectedMonetaryValuef ortheact‘dr
ill
’
.
Shoul
dthecompanydr i
l
lorsell
?

Possi
bleResul
ts Pr
obabi
l
iti
es Rupee
Consequences

Dr
ywel
l 0.
10 -
100000

Gaswel
lonl
y 0.
40 45000
Oi
landgas 0.
30 98000

Oi
lwel
lonl
y 0.
20 199000

Sol
uti
on16: P=0.
10,
drywel
l Rs.-
100000

P=0.
40,
Gaswel
l Rs.45000
E
P=0.
30,Oil
&GasRs.98000
Dr
il
l
P=0.20,
Oil
Rs.199000
D1

Sel
l
Rs.
1200
EMV=Rs.12000
0

Inordertoanal
ysesthi
stree,wefi
ndExpect edMonetaryValue(EMV’s)forthechancenode
E1.
EMVofchancenodeE1 =[ 0.10*
(-100000)+0.40*
45000+0.30*98000+0.20*199000]=Rs.
77200.
Themaxi mum EMVi sRs.77200.Hencebymaxi mum EMVcr i
ter
ion,t
heopt i
malcourseof
acti
on,shownbyt hi
ckl
ineforthecompanyi stodri
l
lthepropert
yforoil
.