Download - 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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Decision Making under UncertaintyDecision Making under Uncertainty--
Cont.Cont.
2- Maximin: Pessimistic (conservative)Approach
Choose the alternative with maximum minimum
output.
MaxiMin
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Decision Making under UncertaintyDecision Making under Uncertainty--
Cont.Cont.
3- Equally likely (Laplace)
Assume all states of nature to be equally likely,
choose maximum Average.
Equaly likely
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Decision Making under UncertaintyDecision Making under Uncertainty--
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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Decision Making under UncertaintyDecision Making under Uncertainty--
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