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# Decision Analysis

Section 1

Definitions

## Decision Analysis Theory :An analytical and systematic way to

tackle problems and make decisions.

situation

## Payoff table/Decision Table (Vij): The consequence resulting from

specific combination of a decision alternative(di) and a state of
nature(sj) or a means of organizing a decision situation, presenting
the payoffs from different decisions/alternatives given the
various states of nature

## State of Nature (Sj):The possible outcomes for a chance

event(uncertain future event)

## Alternatives: A course of action or a strategy may be chosen by a

decision maker
A good decision is based on logic.

Types of DecisionDecision-Making
Environments

## 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 certainty
the outcome of every alternative or decision choice.

## Type 2: Decision making under uncertainty.

A decision making environment in which the future outcomes or
state of nature may occur . The decision maker does not know the
probabilities of the various outcomes. Actually s/he knows
nothing!

## Type 3: Decision making under risk.

A decision making environment in which the future outcomes or
state of nature may occur as a result of a decision or alternative.
The decision maker does know the probabilities of the various
outcomes.

## Decision Making under Uncertainty

1.

Maximax(optimistic)

2.

Maximin(pessimistic)

3.

Equally likely(laplace)

4.

Criterion of Realism(Hurwicz)

5.

Minimax Regret

## Decision Making under UncertaintyUncertaintyCont.

1-Maximax: Optimistic Approach
Find the alternative that maximizes the maximum
outcome for every alternative.

MaxiMax

## Decision Making under UncertaintyUncertaintyCont.

2- Maximin: Pessimistic (conservative)Approach
Choose the alternative with maximum minimum
output.

MaxiMin

## Decision Making under UncertaintyUncertaintyCont.

3- Equally likely (Laplace)
Assume all states of nature to be equally likely,
choose maximum Average.

Equaly likely

## Decision Making under UncertaintyUncertaintyCont.

4- Criterion of Realism (Hurwicz)/Weighted Average

## Decision maker uses a weighted average

based on optimism of the future.

Realism

## Decision Making under UncertaintyUncertaintyCont.

5- Minimax Regret:

## Choose the alternative that minimizes the

maximum opportunity loss .

MiniMax

## Structure of Decision Trees

A graphical representation where:
1-A decision node from which one of several alternatives
may be chosen.

## decision Node (point):in a decision tree ,this is point

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.

A State of
Nature
Node

Favorable Market
1

Unfavorable Market
A
Decision
Node

Favorable Market
Construct
Small
Plant
2

Unfavorable Market

## Favorable (0.5) \$200,000

A State of Nature Market
Node
1
180,,000
Unfavorable (0.5)-\$180
Market

A Decision
Node

Construct
Small
Plant

## Favorable (0.5) \$100,000

Market
2
-\$20,000

Unfavorable (0.5)
Market
0