Decision Analysis - DSS Section 1

8/10/2019 Decision Analysis - DSS Section 1

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DecisionDecision AnalysisAnalysisSection 1


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DefinitionsDefinitions Decision Analysis Theory :An analytical and systematic way to

tackle problems and make decisions.

Decision tree: A graphical representation of the decision makingsituation

Payoff table/Decision Table (Vij): The consequence resulting fromspecific combination of a decision alternative(di) and a state ofnature(sj) or a means of organizing a decision situation, presentingthe payoffs from different decisions/alternatives given thevarious states of nature

State of Nature (Sj):The possible outcomes for a chanceevent(uncertain future event)

Alternatives: A course of action or a strategy may be chosen by adecision maker

A good decision is based on logic.


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Types of DecisionTypes of Decision--MakingMaking

EnvironmentsEnvironments Type 1: Decision making under certainty.A decision making environment in which the future outcomes or

state of nature are known. Decision maker knows with certaintythe outcome of every alternative or decision choice.

Type 2: Decision making under uncertainty.

A decision making environment in which the future outcomes orstate of nature may occur . The decision maker does not know the

probabilities of the various outcomes. Actually s/he knowsnothing!

Type 3: Decision making under risk.

A decision making environment in which the future outcomes orstate of nature may occur as a result of a decision or alternative.The decision maker does know the probabilities of the variousoutcomes.


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Six steps in Decision MakingSix steps in Decision Making


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Decision Making under UncertaintyDecision Making under Uncertainty

1. Maximax(optimistic)

2. Maximin(pessimistic)

3. Equally likely(laplace)4. Criterion of Realism(Hurwicz)

5. Minimax Regret


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Decision Making under UncertaintyDecision Making under Uncertainty--

Cont.Cont.

1-Maximax: Optimistic Approach

Find the alternative that maximizes the maximum

outcome for every alternative.

MaxiMax


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Cont.Cont.

2- Maximin: Pessimistic (conservative)Approach

Choose the alternative with maximum minimum

output.

MaxiMin


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Cont.Cont.

3- Equally likely (Laplace)

Assume all states of nature to be equally likely,

choose maximum Average.

Equaly likely


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Cont.Cont.

4- Criterion of Realism (Hurwicz)/Weighted Average

Decision maker uses a weighted average

based on optimism of the future.

CR = *(row max)+(1- )*(row min)

Realism


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Cont.Cont.

5- Minimax Regret:

Choose the alternative that minimizes the

maximum opportunity loss .

MiniMax


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Structure of Decision TreesStructure of Decision Trees

A graphical representation where:

1-A decision node from which one of several alternatives

may be chosen.

,

where the best of the available alternative is chosen the

branches represent the alternative

2- A state-of-nature node out of which one state of nature

will occur.


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1

AA

A State ofA State of

NatureNatureNodeNode

Favorable Market

Unfavorable Market

Favorable Market

2

NodeNode

Unfavorable Market

ConstructSmallPlant


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1

A State of NatureA State of Nature

NodeNode

Favorable (0.5)Market

Unfavorable (0.5)Market

Favorable (0.5)Construct

$200,000$200,000

--$$180180,,000000

$100,000$100,000

2

ec s onec s on

NodeNode

Unfavorable (0.5)Market

SmallPlant

--$20,000$20,000

00


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Intro to decision analysis (video)Intro to decision analysis (video)

http://www.youtube.com/watch?v=ilr_gUeXH1s


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Lets Start practicing

Decision Analysis - DSS Section 1

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