Chapter 4:

Modeling Decision Processes

Decision Support Systems in the
21st Century, 2nd Edition
by George M. Marakas
Marakas: Decision Support Systems, 2nd Edition 2003, Prentice-Hall

Chapter 4 - 1

4-1: Defining the Problem and Its Structure

A fully formed problem statement contains three
key components:

The current state of affairs

The desired state of affairs

A statement of the central objective(s)

that distinguish the two

Marakas: Decision Support Systems, 2nd Edition

2003, Prentice-Hall

Chapter 4 - 2

Problem Definition Errors

Failing to identify and define the problem fully
may result in a great solution that does not
solve the right problem
A common error: premature focus on the set
of solutions rather than the problem itself
The decision maker may be left with a
solution looking for a problem to solve

Marakas: Decision Support Systems, 2nd Edition

2003, Prentice-Hall

Chapter 4 - 3

Problem Scope
The problem may be worth solving but the
scope is beyond the available resources or
time constraints
In such cases, the scope must be reduced to
a focus that allows a solution
One method to limit the scope is to identify its
breadth by asking questions about people
involved, cost and magnitude
Marakas: Decision Support Systems, 2nd Edition
2003, Prentice-Hall

Chapter 4 - 4

Problem Structure
Design of problem structure is similar to design
of many other entities
What is the final appearance?
What are the elemental details?
What are the relationships between those
elements?
Regardless of context, a problem structure can
be described in terms of choices,
uncertainties and objectives
Marakas: Decision Support Systems, 2nd Edition
2003, Prentice-Hall

Chapter 4 - 5

Problem Structure (cont.)

Choices: there are always at least two
alternatives (one is do nothing)
Uncertainties: situations beyond the direct
control of the decision maker; their individual
probability of occurrence is only estimable
within a certain range
Objectives: methods of establishing the
criteria used to measure the value of the
outcome
Marakas: Decision Support Systems, 2nd Edition
2003, Prentice-Hall

Chapter 4 - 6

Structuring Tools
Influence diagram: a
simple method of
graphing the
components of a
decision and linking
them to show the
relationships between
them

Uncertainty

Decision

Marakas: Decision Support Systems, 2nd Edition

2003, Prentice-Hall

Objective

Chapter 4 - 7

Structuring Tools (cont.)

Decision tree: another
diagram that models
choices and
uncertainties and can
be extended to
include multiple,
sequential decisions

Uncertainty

Decision

Marakas: Decision Support Systems, 2nd Edition

2003, Prentice-Hall

Chapter 4 - 8

Common Decision Structures

Basic Risky Decision: decision maker takes a
choice in the face of uncertainty. Success is
a function of the choice and outcome.
Certainty: a multiple-objective decision with
little risk. Success is a function of the tradeoff between objectives.
Sequential: several risky decisions over time.
Earlier outcomes may affect later choices.
Marakas: Decision Support Systems, 2nd Edition
2003, Prentice-Hall

Chapter 4 - 9

4-2: Decision Models

Decision models can be classified in a number
of ways:
Is time a factor? Models that do not
include time are static versus dynamic
What is the techniques mathematical
focus? Some abstract model types are
deterministic, stochastic, simulation and
domain specific
Marakas: Decision Support Systems, 2nd Edition
2003, Prentice-Hall

Chapter 4 - 10

Model Classification Examples

Deterministic: linear programming, production
planning
Stochastic: queuing theory, linear regression
analysis
Simulation: production modeling, transportation
analysis
Domain-specific: EOQ, technology diffusion,
meteorological models
Marakas: Decision Support Systems, 2nd Edition
2003, Prentice-Hall

Chapter 4 - 11

Conceptual Models
A formal mathematical approach is not always
appropriate
Conceptual models are formulated under the
notion that even though all problems are
unique, no problem is completely new
Decision makers can recall and combine a
variety of past experiences to create an
accurate model of the current situation
Marakas: Decision Support Systems, 2nd Edition
2003, Prentice-Hall

Chapter 4 - 12

4-3: Types of Probability

Three requirements of probability:
1. All probabilities are in the range 0 to 1
2. The probabilities of all outcomes of an
event must add up to the probability of
their union
3. The total probability of a complete set of
outcomes must equal 1

Marakas: Decision Support Systems, 2nd Edition

2003, Prentice-Hall

Chapter 4 - 13

How Are Probabilities Generated?

Long-run frequency: with enough history,
you can estimate an events probability by its
relative frequency
Subjective: probability represents an
individuals degree of belief that an event
will occur
Logic: a probability may be derivable, but its
accuracy may not be acceptable
Marakas: Decision Support Systems, 2nd Edition
2003, Prentice-Hall

Chapter 4 - 14

4-4: Techniques for

Forecasting Probabilities
Direct probability forecasting an expert is
simply asked to estimate the chance that an
outcome will occur
Odds forecasting a series of bets are
proposed to determine how strongly the
bettor feels an event will occur
Comparison forecasting similar to odds
forecasting except that one game has known
probabilities
Marakas: Decision Support Systems, 2nd Edition
2003, Prentice-Hall

Chapter 4 - 15

Decomposing Complex Probabilities

Probabilities for complex events may be more
easily generated by using conditional
probabilities within subsets of the events
For example, it may be easier to forecast sales
of a weather-related product by forecasting
sales under good weather, then bad weather
and then considering the probability of bad
weather
Marakas: Decision Support Systems, 2nd Edition
2003, Prentice-Hall

Chapter 4 - 16

4-5: Calibration and Sensitivity

A decisionmaker is said to be well calibrated if
his probability forecasts are correct at about
the same rate as his confidence in them (9 out
of 10 times his 90% confidence intervals
should be correct).
Calibration requires years of experience and
feedback to develop.
Most of us are too optimistic and our intervals
are too tight.
Marakas: Decision Support Systems, 2nd Edition
2003, Prentice-Hall

Chapter 4 - 17

Sensitivity Analysis
A method for testing the degree to which a set
of assumptions affects the results from a
model.
If a small change in the value of a variable
yields a measurable change in output, that
variable is said to be highly sensitive.
Variables that are not sensitive may be
treated as fixed, reducing the models
complexity.
Marakas: Decision Support Systems, 2nd Edition
2003, Prentice-Hall

Chapter 4 - 18

Value Analysis
We always need to be concerned that enough
reliable information is available to make a
successful decision.
We can determine how much we are willing to
pay for better info by computing its expected
value.
This involves a comparison of the expected
return with the info to the expected return
without the info.
Marakas: Decision Support Systems, 2nd Edition
2003, Prentice-Hall

Chapter 4 - 19