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Chapter 3 Decision Analysis

This document outlines the key steps and concepts in decision analysis. It discusses six steps to decision making: 1) define the problem, 2) list alternatives, 3) identify outcomes, 4) list payoffs, 5) select a model, and 6) make a decision. It also describes three types of decision environments: certainty, uncertainty, and risk. For uncertainty, it lists five criteria to evaluate alternatives: optimistic, pessimistic, realistic, equally likely, and minimax regret. For risk, where probabilities are known, it discusses expected monetary value, expected value of perfect information, expected opportunity loss, and sensitivity analysis.

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Jade Belen
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64 views2 pages

Chapter 3 Decision Analysis

This document outlines the key steps and concepts in decision analysis. It discusses six steps to decision making: 1) define the problem, 2) list alternatives, 3) identify outcomes, 4) list payoffs, 5) select a model, and 6) make a decision. It also describes three types of decision environments: certainty, uncertainty, and risk. For uncertainty, it lists five criteria to evaluate alternatives: optimistic, pessimistic, realistic, equally likely, and minimax regret. For risk, where probabilities are known, it discusses expected monetary value, expected value of perfect information, expected opportunity loss, and sensitivity analysis.

Uploaded by

Jade Belen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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CHAPTER 3: DECISION ANALYSIS

 Six Steps in Decision Making [PAOPMD]


1. Clearly define the problem at hand.
2. List the possible alternatives.
3. Identify the possible outcomes or states of nature.
4. List the payoff (typically profit) of each combination of alternatives and
outcomes.
5. Select one of the mathematical decision theory models.
6. Apply the model and make your decision.

 Types of Decision-Making Environments [CUR]


1. Decision making under certainty — will choose the alternative that will
maximize their well-being or will result in the best outcome.
2. Decision making under uncertainty — decision maker does not know the
probabilities of the various outcomes.
3. Decision making under risk — decision maker knows the probability of
occurence of each outcome.

 Decision Making Under Uncertainty (Criterion) [OPRLR]


1. Optimistic (maximax) — aiming for maximum or the best alternative
2. Pessimistic (maximin) — guarantees the payoff will be at least the maximin
value (the best of the worst values).
3. Criterion of realism (Hurwicz) — weighted average. compromise between an
optimistic and a pessimistic decision.
4. Equally likely (Laplace) — involves finding the average payoff for each
alternative and selectingthe alternative with the best or highest average.
5. Minimax regret — Opportunity loss refers to the difference between optimal
profit or payoff for a given state of nature and the actual payoff received for
a particular decision.

 Decision Making Under Risk


- Is a decision situation in which several possible states of nature may occur, and the
probabilities of these states of nature are known.
1. Expected Monetary Value (EMV) — is the weighted sum of possible payoffs for
each alternative.

2. Exp
e cted
Value
of

Perfected Information (EVPI) — places an upper bound on what to pay for


information. it is the expected value with perfected information minus the maximum
EMV.

3. Expected Opportunity Loss (EOL) — is the cost of not picking the best solution.
It will always result in the same decision as the maximum EMV.

4. Sensitivity Analysis (SA) — investigates how our decision might change with
different input data.

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