D AT E | M O N T H | Y E A R BU275: Business Decision

Presented by
First Name Last Name Models
Instructor – Dr Jason Hurley
WINTER 2023
 Acting
with Integrity
D AT E | M O N T HAdd
| Y E Chris’s
AR report When you choose to act with integrity, you know that
Add web site analytics your work is your own, you earned the grades you received,
Presented by
First Name Last Name and you can be proud of your Laurier degree.

For policies &

information about
acting with integrity:
students.wlu.ca/academic-integrity
 Acting
with Integrity
D AT E | M O N T HAdd
| Y E Chris’s
AR report

Presented by
Add web site analytics So, what is academic misconduct?
First Name Last Name

► Plagiarism another course without permission

► Impersonating another person in a test ► Falsifying, misrepresenting, or forging an
► Buying term papers or assignments academic record or supporting document
► Cheating
► Submitting the same piece of work from

students.wlu.ca/academic-integrity
 D AT E | M O N T HAdd
| Y E Chris’s
report
Golden Rules for
Acting with Integrity
AR
Add web site analytics
Presented by
First Name Last Name

► Understand What is Expected ► Read Your Syllabus

► Cite Your Sources ► Don't Share Your Work
► Be Organized + Prepared ► Ask for Help

students.wlu.ca/academic-integrity
Course Introduction – BU275: Business Decision
Models
Instructor: Jason Hurley (PhD; Bbus[Hons])
• Email: jhurley@wlu.ca
• Office Hours: Currently by appointment via Zoom or in person at LH2049
• Two Graduate Teaching Assistants will also hold regular office hours, and
Undergraduate
D AT E | M O N T H Instructional
| YEAR Assistants will be available at the 2nd year support
center (times
Presented by and locations TBA)
First Name Last Name

Please state BU275 and your section letter in the subject line of emails

• Lectures:
• Section B8 – Tuesday/Thursday 1:00 - 2:20pm (SB103)
• Section B4 – Tuesday/Thursday 2:30 - 3:50pm (SB103)
Course Introduction – BU275: Business Decision
Models
• Carefully review the Course Syllabus
• Note the sections on missed assignment/exam policies and Excel ability

• Evaluation/Grading on page 1 of syllabus

• 6 Individual Assignments (5% each), Midterm Exam (35%) and Final Exam (35%)
D AT E | M O N T H | Y E A R

Presented by
• Schedule
Firstof Lectures/Topics
Name Last Name and Important Dates on page 4 of syllabus
• Tentative guideline (all material will be covered but may be adjusted if required)

• Course website (MyLS): http://mylearningspace.wlu.ca/

• Lecture slides, assignments, supplementary material, links to other websites
(including other instructors)
• It is your responsibility to regularly monitor the BU275 course website
Course Objectives – BU275: Business Decision
Models
1. Understand how mathematical modeling and quantitative methods
can be used to improve business decision making
2. Understand the unstructured nature of business problems and how to
model them
3. Improve
D AT E |skills
M O N T Hin
| Ydeveloping
EAR mathematical models for business
decisions
Presented andby applying a variety of decision analysis (management
science) techniques
First Name Last Name

4. Be capable of using decision support software, including Excel and

add-ins (Pivot Tables, Data Analysis, Solver and Simulation)
5. Prepare students for further application of these techniques in 3rd and
4th year courses, as well as in their careers
Course Resources – BU275: Business Decision
Models
• Suggested textbook:
• Bernard W. Taylor, Introduction to
Management Science, 13th edition.
Pearson. 2019.
D AT E | M O N T H | Y E A R

Presented by
First Name Last Name

• Relevant chapter PowerPoints posted

on MyLS (Content  Textbook
Powerpoints)
Additional Resources and Practice Problems

• Questions from the textbook and other sources will be assigned to

reinforce the material covered in lectures

• It is highly recommended that you work through these problems

regularlyD AT as the
E | M O N T Hpreparation
| YEAR will be extremely beneficial for exams
Presented by
First Name Last Name
• Solutions will be posted on MyLS at least one week after the problems
are assigned
• Only use these to check your answers – the best way to learn is by doing!
Topics Covered – BU275: Business Decision
Models
• Decision Analysis
• Payoff Tables
• Decision Trees
• Bayesian Updating
• Data Driven Problem Solving
• UtilityD AT E | M O N T H | Y E A R
• Queuing Models
Presented by
First Name Last Name
• Computer Simulation
• Linear Programming
• Integer Programming
Introduction to Decision Analysis
D AT E | M O N T H | Y E A R

Presented by
First Name Last Name
 Decision Analysis Examples
• A manufacturer introducing a new
product into the marketplace • A government contractor bidding on a
• What will be the reaction of potential new contract
customers?
• What will be the actual costs of the project?
• How much should be produced?
• Which other companies might be bidding?
• Should the product be test-marketed?
• What are their likely bids?
• How muchD ATadvertising
E | M O N T H |isYneeded?
EAR

Presented by
First Name Last Name • An agricultural firm selecting the mix of
• A financial firm investing in securities crops and livestock for the season
• Which are the market sectors and individual • What will be the weather conditions?
securities with the best prospects? • Where are prices headed?
• Where is the economy headed? • What will costs be?
• How about interest rates?
• How should these factors affect the
investment decisions?
Types of Decision Problems

Decision making under…

1. Uncertainty - no probability information on possible
outcomes (states of nature) are available
D AT E | M O N T H | Y E A R

2. Risk - probabilities
Presented by
First Name Last Name
of outcomes (states of nature) are
available
3. Certainty - know which outcome (state of nature)
will occur; hence select best alternative
What is Decision Analysis?
• Decision making under uncertainty/risk is inherently a difficult task
• Can probabilities be assigned to future occurrences?

• Management Science (MS) is a discipline that provides rational,

systematic, and scientific approaches to aid managerial decision making
D AT E | M O N T H | Y E A R
for problems that involve quantitative factors
Presented by
First Name Last Name

• MS was traditionally called Operations Research (OR) because the field

originated during WWII when British scientists and engineers were
researching how to manage/optimize military operations

• Decision Sciences and Business Analytics are closely related fields

MS/OR Approach
1. Define the problem and gather data
2. Formulate a model to represent the problem
• Models are simplified representations or abstractions of reality
• Many of the complexities of reality are actually irrelevant in problem solving and we can make
assumptions which enable us to model real-world systems
• Mathematical
D AT E | M Oand
N T H Spreadsheet
| YEAR model formulation
3. Test the model
Presented by and refine as needed
First Name Last Name
4. Apply the model to analyze the problem and develop
recommendations for management
5. Help to implement the recommendations
Benefits of Decision Models

• Time compression
• Low cost of construction
• Low cost of execution (especially that of errors)
• Ability Dto manipulate and update model
AT E | M O N T H | Y E A R

• Ability Presented
to model by
First Name Lastrisk Nameand uncertainty
• Ability to model large and extremely complex systems with possibly
infinite solutions
• Enhance/reinforce learning and training
MS/OR Tools and Techniques for Decision
Making
• Stochastic tools:
• Payoff Tables
• Decision Trees
• Queuing Models
D AT E | M O N T H | Y E A R
• Simulation
Presented by
First Name Last Name

• Deterministic tools (mathematical programming):

• Linear Programming
• Network Flows
• Integer Programming
Components of Decision Analysis: Terminology and
Notation
• Decision Alternatives
• controllable  our choice (often denoted by di)
• Outcomes (States of nature)
D AT E | M O N T H | Y E A R
• uncontrollable  future events (often denoted by sj)
Presented by
First Name Last Name
• define all (mutually exclusive, collectively exhaustive)
• Criteria to evaluate alternatives associated with outcomes
(Payoffs)
• Payoffs can be expressed in terms of profit, cost, time, distance or
any other appropriate measure (often denoted by Vij)
 Components of Decision Analysis: Terminology

The alternatives (di) are the options for the choice to be made by the decision maker.

D AT E | M O N T H | Y E A R

Alternative
Presented by (di)
First Name Last Name
d1

d2
Components of Decision Analysis: Terminology
The states of nature (sj) are possible situations that could occur once the
decision is executed.

The outcome is affected by random factors outside of the control of the

decision maker, although they may have some information about the relative
likelihood
D AT E | M(probability)
ONTH | YEAR of the possible states of nature occurring.
Presented by
First Name Last Name State of Nature (sj)

Alternative (di) s1 s2

d1

d2
Components of Decision Analysis: Terminology

• Each combination of a decision alternative and a state of nature results in

some outcome, which can be organized into a payoff table
• The payoff (Vij) is a quantitative measure of the value to the decision
maker of the outcome (often monetary value such as cost or revenue).
D AT E | M O N T H | Y E A R

Presented by State of Nature (sj)

First Name Last Name
Alternative (di) s1 s2

d1 Payoff V11 Payoff V12

d2 Payoff V21 Payoff V22

Decision Analysis Example – The Goferbroke
Company
• The Goferbroke Company develops oil wells in unproven territory.
• A consulting geologist has reported that there is a one-in-four chance of oil on a
particular tract of land.
• Drilling for oil on this tract would require an investment of $100,000.
D AT E | M O N T H | Y E A R
• If the tract contains oil, it is estimated that the net revenue generated would be
Presented by
approximately
First Name$800,000.
Last Name
• Another oil company has offered to purchase the tract of land for $90,000.

Should the Goferbroke Company drill for oil or sell the tract of land?
Decision Analysis Example – The Goferbroke
Company
Payoff Table
State of Nature

Alternative Oil Dry

D AT E | M O N T H | Y E A R
Drill for Oil 700,000 -100,000
Presented by
First Name
Sell theLast
LandName 90,000 90,000

Probability 0.25 0.75

Recall: A consulting geologist has reported that there is a one-in-four chance of oil on this
particular tract of land, therefore we can assign probabilities to states of nature occurring.
Decision Analysis Example – The Goferbroke
Company
Should the Goferbroke Company drill for oil or sell the tract of land if…
• the decision maker is optimistic?
• the decision maker is pessimistic?
• the decision maker wants to minimize their regret? (hint: construct a
D AT E | M O N T H | Y E A R

regret (opportunity
Presented by loss) table)
First Name Last Name
Decision Making Criteria

Five commonly used criteria:

1. Optimistic approach (Maximax or Minimin)
Uncertainty
2. Pessimistic (Conservative) approach (Maximin or Minimax)
(without probabilities)
3. Minimax Regret approach
D AT E | M O N T H | Y E A R
4. Equal Likelihood (Laplace) approach
Presented by
5. Expected Value
First Name Last approach
Name
Risk
(with probabilities)
… and a sixth decision criterion:
6. Expected Opportunity Loss
Optimistic Approach

• Used by the optimistic decision maker

• Also called Maximax or Minimin

• Maximize the maximum payoff or minimize the minimum cost
D AT E | M O N T H | Y E A R

Presented by
• The decision with
First Name Last Namethe best possible payoff is chosen
• If the problem is in terms of costs (minimization problem), the decision with the
lowest cost would be chosen
• If the problem is in terms of profits (maximization problem), the decision with
the highest profit would be chosen
Optimistic Approach

State of Nature

Alternative Oil Dry

D AT E | M O N T H | Y E A R
Drill for Oil 700,000 -100,000
Presented by
First Name
Sell theLast
LandName 90,000 90,000

The best (maximum) of the best (maximum) payoffs

Pessimistic (Conservative) Approach

• For each decision, the worst payoff is listed and then the decision
corresponding to the best of these worst payoffs is selected (i.e., worst
possible payoff is maximized)
• If the payoff is in terms of costs, the maximum costs would be determined for
each decision and then the decision corresponding to the minimum of these
D AT E | M O N T H | Y E A R

maximum
Presented bycosts is selected (i.e., maximum possible cost is minimized, called
First Name Last Name
Minimax)
• If the payoff was in terms of profits, the minimum profits would be determined
for each decision and then the decision corresponding to the maximum of these
minimum profits is selected (i.e., minimum possible profit is maximized, called
Maximin)
Pessimistic Approach

State of Nature

Alternative Oil Dry

D AT E | M O N T H | Y E A R
Drill for Oil 700,000 -100,000
Presented by
First Name
Sell theLast
LandName 90,000 90,000

The best (maximum) of the worst (minimum) payoffs

Minimax Regret Approach

• Construct a regret (opportunity loss) table

• For each state of nature, calculate the difference between each payoff
and the best payoff i.e., regret
• List the
D AT Emaximum
| M O N T H | Y E A regret
R for each possible decision
Presented by
• Chose
Firstdecision which minimizes the maximum regret
Name Last Name

• Note: Regret is always positive

• We minimize the maximum regret either if payoff is in terms of cost or profit
Minimax Regret Approach

Payoff Table
State of Nature Regret Table State of Nature

Alternative Oil Dry Alternative Oil Dry

Drill for Oil D AT700,000 -100,000

E | MONTH | YE AR Drill for Oil
Sell the Presented by
Land First 90,000 90,000
Name Last Name Sell the Land

𝑟 𝑖𝑗 =max 𝑦 𝑖𝑗 − 𝑦 𝑖𝑗
𝑗
Regret = best payoff – original payoff
in column in cell

Minimize the maximum regret

Minimax Regret Approach

Regret Table
State of Nature

Alternative
D AT E | M O N T H | Y E A R
Oil Dry

Presented
Drill by
for Oil 0 190,000
First Name Last Name

Sell the Land 610,000 0

 Thanks for your attention!
D AT E | M O N T H | Y E A R

Presented by
First Name Last Name
Next class:
• Decision Analysis continued…
• Decision Making Criteria (with probabilities)
• Decision Trees