Professional Documents
Culture Documents
Components of Decision Making Decision Making without Probabilities Decision Making with Probabilities
Decision Analysis Components of Decision Making A state of nature is an actual event that may occur in the future. A payoff table is a means of organizing a decision situation, presenting the payoffs from different decisions given the various states of nature.
Decision-Making Criteria: maximax, maximin, minimax, minimax regret, Hurwicz, equal likelihood
Chapter 12 - Decision Analysis 3
Table 12.3 Payoff Table Illustrating a Maximax Decision Chapter 12 - Decision Analysis 4
- The Hurwicz criterion multiplies the best payoff by and the worst payoff by 1- ., for each decision, and the best result is selected.
Decision
Apartment building Office building
Values
$50,000(.4) + 30,000(.6) = 38,000 $100,000(.4) - 40,000(.6) = 16,000
Warehouse
Values $50,000(.5) + 30,000(.5) = 40,000 $100,000(.5) - 40,000(.5) = 30,000 $30,000(.5) + 10,000(.5) = 20,000
Maximin
Minimax regret Hurwicz
Apartment building
Apartment building Apartment building
Equal liklihood
Apartment building
Chapter 12 - Decision Analysis 9
Exhibit 12.1
10
Exhibit 12.2
Exhibit 12.3
11
Table 12.8 Regret (Opportunity Loss) Table with Probabilities for States of Nature
EOL(Apartment) = $50,000(.6) + 0(.4) = 30,000 EOL(Office) = $0(.6) + 70,000(.4) = 28,000 EOL(Warehouse) = $70,000(.6) + 20,000(.4) = 50,000
Chapter 12 - Decision Analysis 13
Decision Making with Probabilities Solution of Expected Value Problems with QM for Windows
Exhibit 12.4
14
Decision Making with Probabilities Solution of Expected Value Problems with Excel and Excel QM (1 of 2)
Exhibit 12.5
15
Decision Making with Probabilities Solution of Expected Value Problems with Excel and Excel QM (2 of 2)
Exhibit 12.6
16
EVPI equals the expected value given perfect information minus the expected value without perfect information.
EVPI equals the expected opportunity loss (EOL) for the best decision.
17
Decision with perfect information: $100,000(.60) + 30,000(.40) = $72,000 Decision without perfect information: EV(office) = $100,000(.60) - 40,000(.40) = $44,000 EVPI = $72,000 - 44,000 = $28,000 EOL(office) = $0(.60) + 70,000(.4) = $28,000
Chapter 12 - Decision Analysis 18
Exhibit 12.7
19
20
21
Decision Making with Probabilities Decision Trees with Excel and TreePlan (1 of 4)
Exhibit 12.9
23
Decision Making with Probabilities Decision Trees with Excel and TreePlan (2 of 4)
Exhibit 12.10
24
Decision Making with Probabilities Decision Trees with Excel and TreePlan (3 of 4)
Decision Making with Probabilities Decision Trees with Excel and TreePlan (4 of 4)
27
Figure 12.4 Sequential decision tree with nodal expected values Chapter 12 - Decision Analysis 28
Exhibit 12.13
29
Table 12.11 Payoff Table for the Real Estate Investment Example Chapter 12 - Decision Analysis 31
33
Decision Analysis with Additional Information Decision Trees with Posterior Probabilities (1 of 2)
- Decision tree below differs from earlier versions in that : 1. Two new branches at beginning of tree represent report outcomes;
2. Probabilities of each state of nature are posterior probabilities from Bayess rule.
34
Decision Analysis with Additional Information Decision Trees with Posterior Probabilities (2 of 2)
- EV (apartment building) = $50,000(.923) + 30,000(.077) = $48,460 - EV (strategy) = $89,220(.52) + 35,000(.48) = $63,194
35
Decision Analysis with Additional Information Computing Posterior Probabilities with Tables
36
37
Expected Cost (insurance) = .992($500) + .008(500) = $500 Expected Cost (no insurance) = .992($0) + .008(10,000) = $80 - Decision should be do not purchase insurance, but people almost always do purchase insurance. - Utility is a measure of personal satisfaction derived from money. - Utiles are units of subjective measures of utility.
a. Determine the best decision without probabilities using the 5 criteria of the chapter. b. Determine best decision with probabilites assuming .70 probability of good conditions, .30 of poor conditions. Use expected value and expected opportunity loss criteria. c. Compute expected value of perfect information. d. Develp a decision tree with expected value at the nodes. e. Given following, P(Pg) = .70, P(Ng) = .30, P(Pp) = 20, P(Np) = .80, determine posteria probabilities using Bayess rule. f. Perform a decision tree analysis using the posterior probability obtained in part e.
Chapter 12 - Decision Analysis 39
Maximin Decision: Expand Decisions Expand Status quo Sell Minimum Payoffs $500,000 (maximum) -150,000 320,000
Chapter 12 - Decision Analysis 40
41
Sell
Sell
42
Sell
43
44
P(pN) = .533
45
Step 6 (part f): Perform Decision tree Analysis with Posterior Probabilities
46