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Decision Analysis
Beni Asllani
Copyright 2006 John Wiley & Sons, Inc. University of Tennessee at Chattanooga
Lecture Outline
Decision Analysis
Decision Making without Probabilities
Decision Analysis with Excel
Decision Making with Probabilities
Expected Value of Perfect Information
Sequential Decision Tree
Quantitative methods
A set of tools for operations manager
Decision analysis
a set of quantitative decision-making
techniques for decision situations in which
uncertainty exists
Example of an uncertain situation
demand for a product may vary between 0 and 200
units, depending on the state of market
States Of Nature
Decision a b
1 Payoff 1a Payoff 1b
2 Payoff 2a Payoff 2b
Maximax
Choose decision with the maximum of the
maximum payoffs
Maximin
Choose decision with the maximum of the
minimum payoffs
Minimax regret
Choose decision with the minimum of the
maximum regrets for each alternative
Hurwicz
Choose decision in which decision payoffs are
weighted by a coefficient of optimism, alpha
Coefficient of optimism is a measure of a
decision maker’s optimism, from 0 (completely
pessimistic) to 1 (completely optimistic)
Equal likelihood (La Place)
Choose decision in which each state of nature is
weighted equally
STATES OF NATURE
Good Foreign Poor Foreign
DECISION Competitive Conditions Competitive Conditions
STATES OF NATURE
Good Foreign Poor Foreign
DECISION Competitive Conditions Competitive Conditions
Expand: $800,000
Status quo: 1,300,000 Maximum
Sell: 320,000
Decision: Maintain status quo
Expand: $500,000
Maximum
Status quo: -150,000
Sell: 320,000
Decision: Expand
Copyright 2006 John Wiley & Sons, Inc. Supplement 2-10
Minimax Regret Solution
Good Foreign Poor Foreign
Competitive Conditions Competitive Conditions
= 0.3 1 - = 0.7
n
EV (x) = p(xi)xi
i =1
where
xi = outcome i
p(xi) = probability of outcome i
$450,000
0.60 $2,300,000
$1,390,000
3
0.40
0.30
$790,000 7
$1,360,000
0.70 $1,000,000
5
$210,000
Copyright 2006 John Wiley & Sons, Inc. Supplement 2-24
Copyright 2006 John Wiley & Sons, Inc.
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