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Decision Rules
a) Decisions Under Uncertainty
Laplace Principle Maximin or Minimax Principle Maximax or Minimin Principle Hurwicz Principle Savage Principle
(continued)
4. Decision Trees
a) Decisions Under Uncertainty b) Decision and Chance Nodes c) Rollback Method
Identification of states of nature, or events Identification of courses of action, or acts Determination of the pay-offs, depicting outcomes of various combinations of acts and events (pay-offs resulting from various act-event combinations can be either gains/losses or costs) Choosing, on the basis of some criterion, from among different alternatives
2.
3.
4.
A conditional pay-off table is set up either using given detailed information or through an algebraically expressed pay-off function A conditional regret matrix can also be set up as follows: When pay-offs are represented as gains: For every event, consider each act one by one and find excess of largest pay-off (coming from optimal act) over pay-off from the act in consideration When pay-offs are represented as costs: For every event, consider each act one by one and find excess of pay-off from the act in consideration over the smallest pay-off (coming from optimal act)
A toy company is bringing out a new type of toy. The company is attempting to decide whether to bring out a full, partial or minimal product line. The company has three levels of product acceptance. The management will make its decision on the basis of anticipated profit from the first year of production. The relevant data are shown in the following table:
Anticipated First Year Profit (in '000 Rs)
Demand High Medium Low Level of Production
Full
180 110 -70
Partial
110 90 -40
Minimal
60 30 10
The given matrix is a conditional pay-off matrix. The levels of demand are the states of nature as they are not in control of manager, while levels of production are the possible courses of action. Profits/losses resulting from various combinations are the pay-offs. Mark the largest value in each row, and subtract each value of the row from it. It gives the regret values.
Conditional Regret Matrix
Demand High Medium Low
Level of Production
Full
0 0 80
Partial
70 20 50
Minimal
120 80 0
Demand High
Level of Production
Full
180
Partial
110
Minimal
60
Medium
Low Average Minimum Maximum Hurwicz ( = 0.6)
110
-70 73.3 -70 180 80
90
-40 53.3 -40 110 50
30
10 33.3 10 60 40
(continued)
S. No.
1 2
Criterion
Laplace Maximin
Decision
Full Production Minimal Production
3
4 5
Maximax
Hurwicz ( = 0.6) Minimax Regret
Full Production
Full Production Partial Production
Partial
70 20 50 70
Minimal
120 80 0 120
EVPI = Expected regret with optimal course of action. Also, In case of gains as pay-offs:
EVPI = EPPI minus Expected pay-off under optimal action EPPI = Expected Pay-off under Perfect Information
(continued)
Suppose the probabilities of high, medium and low demands are 0.2, 0.3 and 0.5 respectively Maximum likelihood is for low demand. The best pay-off is for minimal prod production.
Decision is: Minimal Production
Expected Pay-off:
Full Production: 34 Partial Production: 29 Minimal Production: 26
Optimal Decision
Expected Regret:
Full Production: 40 Partial Production: 45 Minimal Production: 48
Note that the decision on the basis of expected pay-off criterion is same as on the basis of expected regret. It is in fact always so
under
Perfect
= 74
(continued)
For every course of action, note that Expected Pay-off + Expected Regret = EPPI For Partial Production: 29 + 45 = 74 For Minimal Production: 26 + 48 = 74 Maximisation of Expected Pay-off obviously leads to minimisation of Expected Regret
Uses additional given information in taking decisions Using given information, prior probabilities are revised and posterior probabilities calculated
using
posterior
Decision Node 1
Water, 0.2 Drill Up to 25 m No Water Drill 20 m 0.3 Stop Rs 25,000 Water 0.7 Rs 10,000 Rs 12,500 No Water Rs 27,500
Decision Node 2
Decision Node
Options
Expected Cost
0.8(15,000 +12,500) + 0.212,500 = Rs 24,500 Rs 25,000 0.324,500+ 0.710,000 = Rs 14,350 Rs 15,000
Decision
Drill to 25 m