Decision analysis ppt @ bec doms

1. Chapter 18 Introduction to Decision Analysis Business Statistics: A Decision-Making Approach 6 th Edition

3. Decision Making Overview Decision Making Certainty Nonprobabilistic Uncertainty Probabilistic Decision Environment Decision Criteria

4. The Decision Environment Certainty Uncertainty Decision Environment Certainty: The results of decision alternatives are known Example: Must print 10,000 color brochures Offset press A: $2,000 fixed cost + $.24 per page Offset press B: $3,000 fixed cost + $.12 per page *

5. The Decision Environment Uncertainty Certainty Decision Environment Uncertainty: The outcome that will occur after a choice is unknown Example: You must decide to buy an item now or wait. If you buy now the price is $2,000. If you wait the price may drop to $1,500 or rise to $2,200. There also may be a new model available later with better features. * (continued)

13. Opportunity Loss The choice “Average factory” has payoff 90 for “Strong Economy”. Given “Strong Economy”, the choice of “Large factory” would have given a payoff of 200, or 110 higher . Opportunity loss = 110 for this cell. Opportunity loss is the difference between an actual payoff for a decision and the optimal payoff for that state of nature Payoff Table Investment Choice (Alternatives) Profit in $1,000’s (States of Nature) Strong Economy Stable Economy Weak Economy Large factory Average factory Small factory 200 90 40 50 120 30 -120 -30 20

14. Opportunity Loss (continued) Payoff Table Opportunity Loss Table Investment Choice (Alternatives) Profit in $1,000’s (States of Nature) Strong Economy Stable Economy Weak Economy Large factory Average factory Small factory 200 90 40 50 120 30 -120 -30 20 Investment Choice (Alternatives) Opportunity Loss in $1,000’s (States of Nature) Strong Economy Stable Economy Weak Economy Large factory Average factory Small factory 0 110 160 70 0 90 140 50 0

25. Sample Decision Tree Large factory Small factory Average factory Strong Economy Stable Economy Weak Economy Strong Economy Stable Economy Weak Economy Strong Economy Stable Economy Weak Economy

26. Add Probabilities and Payoffs Large factory Small factory Decision Average factory Uncertain Events (States of Nature) Strong Economy Stable Economy Weak Economy Strong Economy Stable Economy Weak Economy Strong Economy Stable Economy Weak Economy (continued) Payoffs Probabilities 200 50 -120 40 30 20 90 120 -30 (.3) (.5) (.2) (.3) (.5) (.2) (.3) (.5) (.2)

27. Fold Back the Tree Large factory Small factory Average factory Strong Economy Stable Economy Weak Economy Strong Economy Stable Economy Weak Economy Strong Economy Stable Economy Weak Economy 200 50 -120 40 30 20 90 120 -30 (.3) (.5) (.2) (.3) (.5) (.2) (.3) (.5) (.2) EV=200(.3)+50(.5)+(-120)(.2)= 61 EV=90(.3)+120(.5)+(-30)(.2)= 81 EV=40(.3)+30(.5)+20(.2)= 31

28. Make the Decision Large factory Small factory Average factory Strong Economy Stable Economy Weak Economy Strong Economy Stable Economy Weak Economy Strong Economy Stable Economy Weak Economy 200 50 -120 40 30 20 90 120 -30 (.3) (.5) (.2) (.3) (.5) (.2) (.3) (.5) (.2) EV= 61 EV= 81 EV= 31 Maximum EV= 81