You are on page 1of 23

| 


 
    

 
| |! "#
$%& '
&%( ')
First step in decision analysis is Problem Formulation.

Verbal Statement

Uncertain future events referred to as chance events

The outcome referred to as consequence

2 possible chance event outcomes are considered ± strong


demand and weak demand.

The possible outcome for a chance event are referred to as


the states of nature.
PDC Ltd. purchased a land that will be the site of a new luxury condominium
complex. PDC plans to price the individual condominium units between
$300,000 and $1,400,000.

PDC commissioned preliminary architectural drawings for three different -


sized projects: one with 30 condominiums, one with 60 condominiums, and
one with 90 condominiums. The financial success of the project depends upon
the size of the condominium complex and the chance event concerning the
demand for the condominiums.

The statement of the PDC decision problem is to select the size of the new
luxury condominium project that will lead to the largest profit given the
uncertainty concerning the demand for the condominiums.
| 
  

D1 ± a small complex with 30 condominiums


D2 ± a medium complex with 60 condominiums
D3 ± a large complex with 90 condominiums

  

S1 ± strong demand for the condominiums


S2 ± weak demand for the condominiums
%   ,1 01 %% * % %* ,
+* % 01 * 2 % 11 % 0 %
1* 3!14
|+0
|     1% * 3!

    1 * 
   |+*0
  *1% *0

*+,-. */%
The consequence resulting from a specific combination of a
decision alternative and a state of nature is referred to as Payoff.

  

| 
  
|    |   

  | !

"   # $
|
%
  |& ' ()
à Decision Tree provides a graphical representation of the decision
making process. It shows the natural or logical progression that will occur
overtime.

%*5"6
+5|"6 8
7
)

&576

%*5"6
"'
0!+5|76
" :
#

&576

%*5"6
7
5|:6 '
(9

&576
|1 * &%*!%*%

; %<*//
,%+ %1,,*1

* %,,*1
* %<*//

( -%,,*1 ,,*%!%<*


; %<*//
,%+ %1,,*1

|   
 
 


+ *+,-50"6 8

0!+*+,-5076 "'

*+,-50:6 7
* %,,*1
* %<*//

|   
  


+ *+,-50"6 )

0!+*+,-5076 #

*+,-50:6 (9
( -%,,*1 ,,*%!%<*

= >?@=  =?

|   
  | 
 
| 
 

+*+,-20" "757(86 5)()6

0!+*+,-2 07 57("'6 75)(#6


*+,-20: 57(76 "A)(5(96B

|   
  
    

+*+,-20" "7

0!+*+,-2 07 

*+,-20: "
|1 * &%*%
-,1%0!,,*1

>!+*/ %% */%!


5 =6>*/%%<*/ %%*/%!=4

5 =6C>2/* %% */%!


D=>"5 =6>5 "6E5 76EFE5 6>"

-,1%0!*/|1 *%% 506>D=>"5 =6=


-,1%0!*//1%
/*+%*
*0%+%,*%%!*/%/*+%*2<
!,,* %% %!0<1*!0,*0,/1%/*+%**!% %% */
%!2%% 2 !+/*+*+%%1%%<%%2,*%*
%01 *+&1 %%*/%! *%**11!

Y  !"Y  #Y  "


Y  >-,1%0!*/,/1%/*+%*
Y  > -,1%0!%,/1%/*+%**!%% %% */
%!
Y  > -,1%0!%*!%,/1%/*+%**!%%
%% */%!
-,1%0!*//1%/*+%*

/ "*!0*11!%2 1%


0:01,<*//*/G7+*

/ 7*!0*11!%2 1%


0"01,<*//*/G)+*
 &< 
•  &<  , %01 *+&
1*.%0//1H%-,1%0
!*/01 *%%0,<*//%%
+%1%!<*11!4
$
$
49
48
4)
4
4#
4' *%<
4:
47
4"

(9 7
 %%<< 
• % ! 0%*0%+*1 ,*% 
/*% %% */%!*1 ,<*// //1%
%1*++0001 *4
• %, 01 *+&%*!0 %01*/%
,!% 1%1%*%1*1*/ %%%
01 *4
Y % &%' &% !&

5076 475"'6E 485#6 >48

50:6 47576E 485(96 >(:47


INFLUENCE DIà à

   
 I|  | |
 I 

      J
 I| K 
DECISION TEE  L49'
 
$4

I;  L49'
47: |I
$4
: )
$   L49'
   L
$4
7 8
 L4:#
 
$4#
" 9
 L4:#
|I
$4#
' "
 L4:#
II; 4))
L ""
$4#

 L48
 
$47
"7
 L48
|I
$47
# ":  L48
 $   
L
$47
"'
• 5*06>49'@8E4@)>)49'
• 5*0)6>49'@"'E4@#>":4'
• 5*086>49'@7E4@(9>"847
• 5*096>4:#@8E4#@)>)4:#
• 5*0"6>4:#@"'E4#@#>84"#
• 5*0""6>4:#@7E4#@(9>"4"#
• 5*0"76>48@8E47@)>)48
• 5*0":6>48@"'E47@#>"747
• 5*0"'6>48@7E47@(9>"'47

• >C 5*076>4)) 5*0:6E47: 5*0'6


>4))@"847E47:@84"#>"#49:
EXPECTED VàLUE àND
EFFICIENCY
• Expected value of sample information
EVSI=mod[EVwSI-EVwoSI]
EVwSI-expected value with sample information
EVwoSI-expected value without sample information
=15.93-14.2=1.73
• Efficiency of sample information
E=(EVSI/EVPI)*100
EVPI-expected value with perfect information
=(1.73/3)*100=54.1%
&<*!