TKI 4210 – Decision Analysis

01 – Introduction to Decision Analysis

Dr. Nur Aini Masruroh

Sinta Sulistyo, MSIE
Scenario 1

Roy has prostate cancer. He has three alternatives: surgery,

chemotherapy and playing a lot of golf. Prostate cancer is a very bad
disease, so he will die soon, regardless of what he does.

He likes to play golf. If he chooses golf (and has no medical treatment),

he will live on year in pain, but be able to enjoy his golf game during
that time, then he will die.

If he undergoes chemotherapy, he will suffer tremendous nausea for six

months and then he will either live for one good year or die right away.
If he has prostate surgery he will either live two good years or die on
the operating table.

He wants to make his decision based on the probabilities assigned by

his doctor, saying that there is a 60% chance that the surgery will give
its better outcome and a 60% chance that chemotherapy will give its
better outcome. Which alternative should Roy choose?
Scenario 2

Ms Anna, an attractive lady with graduate degree, must decide

among many suitors. Among them include:
◎ Mr. A is very competitive person, holds a high paying job, but
not religiously devoted.
◎ Mr. B loves to do community work during weekends, and holds
a reasonable job with a stable income.
◎ Mr. C does not have a full time job but he is very active in
religion related activities
Why is decision hard to make?

1.Complexity
…some alternatives or possible solutions, some factors to be
considered and many of them are interdependent

2.Uncertainty
…uncertain outcomes or hard to predict, information may be vague,
incomplete, or unavailable

3.Multiple conflicting objectives

…decision maker(s) may have many goals and objectives, the
goals or objectives may be conflicting in nature

4.Accountability and risk attitudes

…may be held accountability for the outcomes, unable to handle
aversion to risk
What does DA offer?

A conceptual framework for thinking systematically about hard

and complex decision problems as to achieve clarity of action

DA provides a set of tools for

○ structuring and representing the dependencies among all the
alternatives and factors in the problem using decision trees and
influence diagram
○ dealing with risks and uncertainty explicitly using probabilities
○ taking into account the risk taking attitude of the decision maker(s)
○ computing best alternatives under different future scenarios
○ managing information collection process for model enhancement
What questions can DA answer?

◎ What is my best course of action?

◎ How risky is this project if I follow the recommended actions?
◎ Which are the most important assumptions?
◎ What potentials are realizable in this project?
◎ Are there more information or data which can help me
enhance my decision and how much are these information
worth paying for?
◎ How much it is worth to be able to control the outcome of an
uncertain variable?
Where is DA used?

Business and Government

• Managing research and development programs
• Forecasting sales of a product
• Electric power generation
• Deciding whether to launch a new product or venture

Medicine
• Help doctors make specific diagnosis
• Firm’s decision regarding different kinds of medical insurance programs
What is decision?

A decision is a commitment to a specific course of action that

irrevocably allocates valuable resources (Ronald Howard)

Example of decision:
○ To fund a research project
○ To take pursue this degree
○ To go on an overseas holiday
○ To take an umbrella when going out

Example of non-decision:
○ Regret not buying a certain item because the price has risen
○ Worry about the not able to graduate from this program
Approaches to studies on decision making

Normative approach: concerned with how rational decisions

ought to be made
○ Optimality
○ Rationality

Descriptive (or behavioral) approach: concerned with

understanding how humans actually make decisions
○ Developing psychological models of human cognition and thinking
○ Explaining human behaviors
○ Predicting human behaviors
Which approach to follow?

Normative approach: ideal for complex decision situation as

it ensures that rational decisions are made

However psychological experiments have found that humans do

not follow the norms prescribed by the normative approach

They also found that humans are not very good in estimating
probabilities

Hence, normative approach alone is insufficient for real world

applications
Prescriptive approach

Prescriptive approach is normative approach taking into

account descriptive

It subscribes fundamentally to the normative approach and

prescribe the procedures for decision modeling and analysis that
take into account the limitation of humans as revealed by the
descriptive approach

DA is based on prescriptive approach

Subjective judgments

Important inputs for decision analysis

○ Subjective judgments about uncertainties
○ Subjective judgments about preferences

Requirement of subjective judgement for decision analysis can be

considered both a strength and a weakness

Strength: does not ignore subjective judgments prevalent in other

management science techniques

Weakness: be careful, human beings are imperfect information

processors
Good decision vs good outcome

Good
Decision

Good Bad
Outcome Outcome

Bad
Decision
Good decision does not guarantee good outcome
– it only enhances the chance
Different roles in conducting DA

◎ Decision makers
Stakeholders or people who will make the final decision and will be
held accountable for it

◎ Decision analyst or consultants:

○ Person or team who facilitates the decision making process
○ This course will train you to be a decision analyst or consultant
○ The analyst must not assume the role of the decision maker
(unless he is also the decision maker)

◎ Domain expert
These are the people called in to provide expert opinion, expert
judgment, etc.
Decision analysis process
 What you
can do
What you
know

What you
want or
value

Decision Model
Course outline

◎ Introduction
◎ Probabilistic thinking
◎ Decision theory
◎ Basic Decision Analysis
◎ Bayesian Network and Influence Diagram
◎ Risk Preference
◎ Multiple Criteria Decision Making
◎ Multiple Attribute Decision Analysis
Grading

First half of the semester : 50%

Midterm : 30%
Quiz : 15%
Homework : 5%

Second half of the semester : 50%

References

◎ Clemen, R.T. and Reilly, T. (2001). Making Hard Decisions

with Decision Tools. California: Duxbury Thomson Learning
◎ Howard, R.A, (1988). Decision Analysis: Practice and
Promise. Management Science, 34(6), pp. 679 – 695.
◎ Russell, S. and Norvig, P. (2003). Artificial intelligent: A
modern approach, 2 ed. Prentice-Hall, Inc.
◎ Saaty, T.L. (1990). How to Make a Decision: the Analytic
Hierarchy Process. European Journal of Operation Research,
48, pp. 9 – 26.
 thankyou

Acknowledgement:
Prof Poh KL