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91
Chapter 19
Decision Analysis
LEARNING OBJECTIVES
Chapter 19 describes how to use decision analysis to improve management decisions, thereby enabling
you to:
1.
2.
3.
4.
5.
Learn about decision making under certainty, under uncertainty, and under risk.
Learn several strategies for decision-making under uncertainty, including expected payoff,
expected opportunity loss, maximin, maximax, and minimax regret.
Learn how to construct and analyze decision trees.
Understand aspects of utility theory.
Learn how to revise probabilities with sample information.
CHAPTER OUTLINE
19.1
19.2
19.3
19.4
Decision Alternatives
Decision Analysis
Decision Making Under Certainty
Decision Making Under Risk
Decision Making Under Uncertainty
Decision Table
Decision Trees
EMV'er
Expected Monetary Value (EMV)
Expected Value of Perfect Information
Expected Value of Sample Information
Hurwicz Criterion
Maximax Criterion
Maximin Criterion
Minimax Regret
Opportunity Loss Table
Payoffs
Payoff Table
Risk-Avoider
Risk-Taker
States of Nature
Utility
92
STUDY QUESTIONS
1. In decision analysis, decision-making scenarios are divided into three categories: decision-making
under ______________, decision-making under _______________, and decision-making under
______________.
2. Many decision analysis problems can be viewed as having three variables:
1. _____________________, 2. ____________________, and 3. ______________________.
3. Occurrences of nature that can happen after a decision has been made that can affect the outcome of
the decision and over which the decision-maker has little or no control are called
_________________________________. The benefits or rewards that result from selecting a
particular decision alternative are called _______________. The various choices or options available
to the decision-maker in any given problem situation are called
__________________________________.
4. Examine the decision table shown below:
Decision
Alternative
1
2
3
State of Nature
1
2
50
25
10
15
20
5
3
75
20
10
4
125
25
20
The selected decision alternative using a Maximax criterion is __________________ and the optimal
payoff is ___________.
5. Use the decision table from question 4. The selected decision alternative using a Maximin criterion is
_____________ and the payoff for this is ____________. Suppose Hurwicz criterion is used to select
a decision alternative and is .3. The selected decision alternative is ____________________ and the
payoff is ____________________. However, if is .8, the selected decision alternative is
____________________ and the payoff is ____________________.
6. Use the decision table from question 4 to construct an Opportunity Loss table. Using this table and a
Minimax Regret criterion, the selected decision alternative is _____________________ and the
minimum regret is _____________.
7. With decision trees, the decision alternatives are depicted by a ______________ node and the states
of nature are represented by a ________________ node.
8. The decision table presented in question 4 has been reproduced below with probabilities assigned to
the states of nature:
Decision
Alternative
1
2
3
State of Nature
1(.20) 2(.35) 3(.40) 4(.05)
50
25
75
125
10
15
20
25
20
5
10
20
The expected monetary value of selecting decision alternative 1 is _______________. The expected
monetary value of selecting decision alternative 2 is _______________. The expected monetary value
of selecting decision alternative 3 is _______________.
93
9. An EMV'er would choose decision alternative __________ based on the results of question 8.
10. The expected value of perfect information for the decision scenario presented in question 8 is
___________________.
11. The degree of pleasure of displeasure a decision-maker has in being involved in the outcome
selection process given the risks and opportunities available is __________________.
12. If it takes more than the expected monetary value to get a player to withdraw from a game, then that
person is said to be a ________________.
13. Consider the decision table shown below:
Decision
1
2
State of Nature
X(.40) Y(.60)
200
500
50
800
94
7.
2.
8.
9.
3.
10.
26
4.
1, 125
11.
Utility
5.
2, 10, 2, 14.5, 1, 90
12.
Risk-taker
6.
1, 60
13.
s1
d1 250
d2 110
d3 390
s2
175
100
140
s3
Max Min
25
250 25
70
110
70
80
390 80
decision: Select d3
decision: Select d2
c.) For = .3
d1: .3(250) + .7(25) = 57.5
d2: .3(110) + .7(70) = 82
d3: .3(390) + .7(80) = 61
decision: Select d2
For = .8
d1: .8(250) + .2(25) = 195
d2: .8(110) + .2(70) = 102
d3: .8(390) + .2(80) = 296
decision: Select d3
Comparing the results for the two different values of alpha, with a more pessimist point-of-view
( = .3), the decision is to select d2 and the payoff is 82. Selecting by using a more optimistic
point-of-view ( = .8) results in choosing d3 with a higher payoff of 296.
s2
0
75
35
s3
95
0
150
Max
140
280
150
R
A 60
B 10
C 10
D 20
D
15
25
40
25
I
25
30
15
5
Max
60
30
40
25
Min
25
10
10
5
95
96
19.7
19.9
Down(.30)
150
175
Lock-In
No
Up(.65)
200
250
No Change(.05)
0
0
EMV
85
110
Dec(.60)
225
125
350
Inc(.40)
425
150
400
EMV
35
15
50
Cond. Joint
.75
.45
.15
.06
F(Dec) = .51
Revised
.8824
.1176
Cond. Joint
.25
.15
.85
.34
F(Inc) = .49
Revised
.3061
.6939
97
Oil(.11)
1,000,000
0
No Oil(.89)
100,000
0
EMV
21,000
0
98
Oil
Actual
Oil
No Oil
.20
.10
No Oil
.80
Forecast
.90
Forecast Oil:
State
Oil
No Oil
Prior
.11
.89
Cond. Joint
.20
.022
.10
.089
P(FOil) = .111
Revised
.1982
.8018
Forecast No Oil:
State
Oil
No Oil
Prior
.11
.89
Cond.
Joint
.80
.088
.90
.801
P(FNo Oil) = .889
Revised
.0990
.9010
99
19.17
Small
200
100
300
Moderate
250
300
400
Large
300
600
2000
Min
200
100
300
Max
300
600
2000
100
Small
0
100
500
Moderate
150
100
0
Large
1700
1400
0
Max
1700
1400
500
Mild(.75)
2000
1200
300
Severe(.25)
2500
200
100
EMV
875
850
200
19.23
Automate
Do Not
Red.(.15)
40,000
5,000
Con.(.35)
15,000
10,000
Inc.(.50)
60,000
30,000
Prior
.15
.35
.50
Cond. Joint
.60
.09
.10
.035
.05
.025
P(FRed) = .150
Revised
.60
.2333
.1667
Forecast Constant:
State
R
C
I
Prior
.15
.35
.50
Cond. Joint
.30
.045
.80
.280
.25
.125
P(FCons) = .450
Revised
.10
.6222
.2778
Forecast Increase:
State
Prior
R
C
I
.15
.35
.50
Cond.
Joint
.10
.015
.10
.035
.70
.350
P(FInc) = .400
Revised
.0375
.0875
.8750
101
EMV
18,750
10,750
102
103
104
105
106
107
108