Chapter 3

(Structuring Decisions)
elements of Decision Problem (DP) :

• Objective s that applies to the decision context

• Immediate decision and subsequent decision(s)
• Alternatives for each decision
• Uncertain elements (events)
• You know how to evaluate consequences.

If all these elements are available how to structure decision problem?

• STEP1: Filter & Operationalize the Objectives

• STEP2: Structure the elements in a logical framework
• STEP3: Fill in the Details.

STEP 1: Filter & Operationalize the Objectives:

• Classify Objectives as Means or Fundamental Objectives

• Classify how to measure Fundamental Objectives

Techniques for identifying objectives:

• Develop a wish list.

• Identify alternatives.
• Consider problems and shortcomings.
• Predict consequences.
• Identify goals, constraints, and guidelines.
• Consider different perspectives.
• Determine strategic objectives.
• Determine generic objectives.

structuring the objectives:

• means organizing them so that they describe in detail what you want to achieve and can be
incorporated in an appropriate way into your decision model.
Classify objectives as means or fundamental objectives:

• Decision Problems are evaluated using only the Fundamental Objective Hierarchy
• Fundamental objectives are organized into hierarchies. The upper levels in a hierarchy represent
more general objectives, and the lower levels explain or describe important elements of the
more general levels.

• Means objectives, on the other hand, are organized into networks.

Questions to aid in classifying objectives:

Getting the decision context right:

• Enlarging the Decision Context may increase the number of objectives and alternatives that are
relevant.
• Decreasing the Decision Context may cause current relevant objectives or alternatives to
become irrelevant.
Three questions need to be answered affirmatively:

• Are you addressing the right problem?

• Can you make the decision? (Decision Ownership)
• Do you have the resources (Time Money to analyze the DP in the current decision context?

STEP2:Structure the elements in a logical framework

• Structure Logic and time sequence between decisions

• Structure Logic (dependence) between the uncertain even
• Structure time sequence of uncertain events related to the sequence of decisions
• Represent Logic by using Influence Diagrams or Decision Trees

Influence Diagrams

• An influence diagram (or decision diagram ) is a graphical model used to represent the structure
of a decision problem and the relationships among its different elements (uncertainties,
decisions, and consequences).
• The diagram is built based on the decision maker’s current state of knowledge about the
situation.
• Elements are represented by:

• Logica l relationships are represented by arrows:

• Comments:
o Influence diagram captures current state of knowledge.
o An influence diagram should NEVER contain cycles.
o Interpreting an influence diagram is generally easy.
o Creating influence diagrams is difficult.
o influence diagrams is not a flow charts
 o Many chance nodes going into the immediate decision node to reflect uncertainty is a
mistake.
• Computation Nodes (Intermediate Calculations):
o Emphasizing the structure of the influence diagram, especially when a node receives
inputs from many other nodes.
o Used in the same way as a payoff node.
o A good approach is to put together a simple version of the diagram first and then add
details as necessary.
• Constructing an influence diagram steps:
1. Identify the decisions to be made If there are more than one decision, determine their time
sequence and draw sequence arcs to connect the decision nodes.
2. Structure fundamental objective hierarchy and represent them as payoff and intermediate
computation nodes in the influence diagram.
3. Identify relevance relationships between the decision nodes and computation nodes or
payoff node and draw dependence arcs to connect them.
4. Identify all the uncertain events.
5. Identify the sequence relationships between the chance nodes and decision nodes and draw
corresponding arcs between them.
6. Identify the relevance relationships between the chance nodes and draw corresponding arcs
between them.
7. Identify the relevance relationships between the chance nodes and computation nodes or
payoff node and draw corresponding arcs between them.
8. Check the appropriateness of the influence diagram (any missing and/or irrelevant
information).

Decision tree:

• Decision trees display more details of a decision problem than influence diagrams
• Decision trees explicitly identify the sequence of decisions/events (from left to right)
• Decision trees represent all possible future scenarios
o One branch for each decision alternative
o One branch for each outcome of an uncertain event (outcomes must be mutually
exclusive and collectively exhaustive)
• Structuring a Decision Tree:
o Decision Trees are evaluated from left to right.
o Only one alternative can be chosen after each decision node.
o Outcome from a chance event need to be complete.
o Decision Trees represent all possible future scenarios.
o Think of nodes as occurring in time sequence.
o If for chance nodes the order is not important then use the easiest interpretation.
• Basic Decision Trees:

The Basic Risk Decision

The Double Risk Dilemma

Rang of Risk Dilemma

Imperfect Information

Sequential Decisions

Decision Trees and Influence Diagrams Compared:

Decision Tree Influence Diagram

When DP is complex decision trees, may get
too large for presentation
Decision trees show more detail, hence are
more useful for in depth understanding
For sensitivity analysis decision trees may be
better
For presentation a DP influence diagram are
superior
Influence diagrams are better in the
structuring phase
Influence diagrams present the relevance
between uncertainty nodes decision trees do
not

Influence diagrams and decision trees are isomorphic.

Each technique has its strength and weakness Using both may work complementary.
Both must pass the clarity test No misunderstanding should be possible about the basic key
elements in the decision problem
STEP3:Fill in the Details, e.g.

• Give precise definitions of decisions & uncertain events.

• Specify probability distributions for the uncertain events through a combination of data analysis
& expert judgment.
• Specify precisely how consequences are measured and formalize the tradeoff between
objectives.
• Steps:
o Define the elements in the decision model clearly.
o Every Element of the Decision Model Needs to Pass the Clarity Test.
o Cash Flows and Probabilities:
o Specific chances associated with each outcome of uncertain events.
o Specific cash flows at different times.
o Defining Measurement Scales for Fundamental Objectives (Objectives are measured in
attributes e.g. Dollars Hours Percentage)