1 decision making under uncertainty. 2 the maximin criterion a decision table for the food...
Post on 20-Dec-2015
214 views
TRANSCRIPT
2
The maximin criterion
A decision table for the food manufacturer
(Daily profits) Demand (no. of batches) 1 2
Course of actionProduce 1 batch $200 $200Produce 2 batches –$600 $400
3
The Expected Monetary Value (EMV) criterion
Another decision table for the food manufacturer
(Daily profits) Demand (no. of batches)1 2Probability 0.3 0.7
Course of actionProduce 1 batch $200 $200Produce 2 batches –$600 $400
4
Calculating expected profits
Produce one batch:
Expected daily profit
= (0.3 $200) + (0.7 $200) = $200
Produce two batches:
Expected daily profit
= (0.3 –$600) + (0.7 $400) = $100
6
Limitations of the EMV criterion
• It assumes that the decision maker is neutral to risk
• It assumes a linear value function for money
• It considers only one attribute - money
15
Utility independence
Attribute A is utility independent of
attribute B, if the decision maker’s
preferences for gambles involving different
levels of A, but the same level of B, do not
depend on the level of attribute B…
18
The project manager’s utilities for overrun and cost
Overrun Cost of(weeks) Utility project ($) Utility
0 1.0 50 000 1.00
1 0.9 60 000 0.96
3 0.6 80 000 0.90
6 0.0 120 000 0.55
140 000 0.00
19
Multi-attribute utility function
u(x1,x2)
=k1u(x1) + k2u(x2) + k3u(x1)u(x2)
where: k3 = 1– k1– k2