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Decision Analysis

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Ananda Prasuta
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27 views21 pages

Decision Analysis

Uploaded by

Ananda Prasuta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Decision

Analysis
Decision
making under
certainty
Overall idea of
AHP
AHP is designed for situations in which
ideas, feelings, and emotions affecting the
decision process are quantified to provide
a numeric scale for prioritizing the
alternatives.
What is AHP?

Goal programming is a method that provides us with a mathematical “quantity” for the
decision variables that best achieves a set of goals. It answers the question “How
much?” The analytical hierarchy process (AHP), developed by Thomas Saaty, is a
method for ranking decision alternatives and selecting the best one when the decision
maker has multiple objectives, or criteria, on which to base the decision. Thus, it
answers the question “Which one?” A decision maker usually has several alternatives
from which to choose when making a decision. For example, someone buying a house
might have several houses for sale from which to choose; someone buying a new car
might have several makes and styles to consider; and a prospective student might
select a college to attend from a group of schools.
Example

We will demonstrate AHP by using an example. Southcorp Development builds and


operates shopping malls around the country. The company has identified three
potential sites for its latest project, near Atlanta, Birmingham, and Charlotte. The
company has identified four primary criteria on which it will compare the sites—(1)
the customer market base (including overall market size and population at different age
levels); (2) income level; (3) infrastructure (including utilities and roads); and (4)
transportation (i.e., proximity to interstate highways for supplier deliveries and
customer access).
The overall objective of the company is to select the best site. This goal is at the top of
the hierarchy of the problem. At the next (second) level of the hierarchy, we determine
how the four criteria contribute to achieving the objective. At the level of the problem
hierarchy, we determine how each of the three alternatives (Atlanta, Birmingham, and
Charlotte) contributes to each of the four criteria.
In AHP, the decision maker determines how well
each alternative “scores” on a criterion by using
pairwise comparisons. In a pairwise comparison,
the decision maker compares two alternatives (i.e.,
a pair) according to one criterion and indicates a
preference. For example, Southcorp might
compare the Atlanta (A) site with the Birmingham
(B) site and decide which one it prefers according
to the customer market criterion. These
comparisons are made by using a preference scale,
which assigns numeric values to different levels of Pairwise
preference.
Comparison
For example, if the Atlanta site is “moderately
preferred” to the Birmingham site, then a value of 3 is
assigned to this particular comparison. The rating of 3 is
a measure of the decision maker’s preference for one of
the alternatives over the other.

Pairwise (Cont’)
Southcorp’s pairwise comparison ratings for each of the
three sites for the customer market criterion are
summarized in a matrix, a rectangular array of numbers.
This pairwise comparison matrix will have a number of
rows and columns equal to the decision alternatives.

This matrix shows that the customer market in Atlanta (A) is


equally to moderately preferred (2) over the Charlotte (C)
customer market, but Charlotte (C) is strongly preferred (5)
over Birmingham (B). Notice that any site compared against
itself, such as A compared to A, must be “equally preferred,”
with a preference value of 1. Thus, the values along the
diagonal of our matrix must be 1s. Pairwise (Cont’)
The remaining pairwise comparison matrices for
the other three criteria—income level,
infrastructure, and transportation—have been
developed by Southcorp as follows:

Pairwise (Cont’)
Developing
Preferences
Within Criteria
Synthesization

The next step in AHP is to prioritize the decision


alternatives within each criterion. For our site
selection example, this means that we want to
determine which site is the most preferred, the
second most preferred, and the third most
preferred for each of the four criteria. This step
in AHP is referred to as synthesization.
(Cont’)

The first step in developing preference scores is Next, we divide each value in a column by its
to sum the values in each column of the pairwise corresponding column sum. This results in a
comparison matrices. The column sums for our normalized matrix, as follows:
customer market matrix are shown as follows:
Notice that the values in each
column sum to 1. The next
step is to average the values
in each row. At this point, we
convert the fractional values
in the matrix to decimals.

The row averages in table above provide us with Southcorp’s preferences


for the three sites for the customer market criterion. The most preferred
site is Atlanta, followed by Charlotte; the least preferred site (for this
criterion) is Birmingham. We can write these preferences as a matrix with
one column, which we will refer to as a vector:

(Cont’)
(Cont’)
Ranking The
Criteria
(Cont’)
(Cont’)
Developing an
Overall
Ranking
(Cont’)
(Cont’)

Based on these scores developed by AHP, Charlotte


should be selected as the site for the new shopping mall,
with Atlanta ranked second and Birmingham third. To
rely on this result to make its site selection decision,
Southcorp must have confidence in the judgments it
made in the pairwise comparisons, and it must also have
confidence in AHP. However, whether the
AHPrecommended decision is the one made by
Southcorp or not, following this process can help
identify and prioritize criteria and enlighten the company
about how it makes decisions.
Thank you
Brita Tamm
502-555-0152
brita@firstupconsultants.com
www.firstupconsultants.com

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