DECISION MAKING WITH

MULTIPLE OBJECTIVES:
MULTI-ATTRIBUTE
UTILITY FUNCTION
(PART B)

STQM6034 Decision and Game Analysis

 COMPARING THE SCORES
ASSESSING METHODS

STQM6034 Decision and Game Analysis

 The 3 methods

But implies risk

Proportional Scores The Easiest neutrality

Capture
important
In the middle of differences in
the two Ratios Comparison value but not
methods really dealing
with risk
attitudes

If risk is a
But more
serious Utility Functions
demanding
consideration
 COMPARING THE WEIGHTS
ASSESSING METHODS

STQM6034 Decision and Game Analysis

The 3 methods: will work fairly well
If attributes are
reduced easily The Easiest Pricing Out
to monetary
values

A bit more
demanding, but
In the middle of
Swing Weights becomes
the two
relatively easy
methods
once familiar
with it

The only way to

incorporate a
Lottery Weights But the most
risk attitude
demanding
into the trade-
off weights in a
systematic way
 SOME NOTES

STQM6034 Decision and Game Analysis

Some Notes
 The weighted-scoring methods are easy-to-use
techniques but incomplete.

 Certain fundamental characteristics of

choices/interactions among multiple attribute
decision alternatives are ignored.
◦ Two attributes may be substitutes for one
another to some extent.
◦ Attributes can be complementary.

 The previous models are additive combination of

preferences for INDIVIDUAL attributes.
Some Notes
 Use multi-attribute utility theory to capture those
kinds of interactions AND risk attitudes within as
well as across attributes.

 For teaching purposes, we consider only 2

attributes.
 MULTI-ATTRIBUTE UTILITY
FUNCTION

STQM6034 Decision and Game Analysis

Multi-attribute Utility Function
 Let xi = level of attribute i
 Let u(x1,x2) = utility associated with level of
attribute 1 and level of attribute 2

 Issue:
How to determine the utility function u(x1,x2) in
which the chosen lottery or decision alternative will
maximize the expected value of u(x1,x2), that will
result in a decision that reflects the decision
maker’s preferences and attitude towards risk.
Conditions for Multi-attribute Utility
Function
1. Attribute 1 is Utility Independent (UI) of attribute
2, if the selection of lottery that involves the
various levels of attribute 1 does not depend on
the level of attribute 2.

i.e.
Attribute 1 is considered utility independent of
attribute 2 if preferences for uncertain choices
involving different levels of attribute 1 are
independent of the value of attribute 2.
 Conditions for Multi-attribute Utility
Function
2. If Attribute 1 is Utility Independent (UI) of attribute 2,
and attribute 2 is Utility Independent of attribute 1,
then attributes 1 and 2 are Mutually Utility
Independent (MUI).

Therefore the multi-attribute utility function is:

u(x1,x2) = k1u1(x1) + k2u2(x2) + k3u1(x1)u2(x2)

where k1, k2 and k3 are constants/weights and u1(x1)

is a utility function of x1, and u2(x2) is a utility
function of x2
interaction
 Conditions for Multi-attribute Utility
Function
3. The multi-attribute utility function is additive
independent if the decision maker is
neutral/indifferent between the lotteries

p = 0.5
X1 (BEST), X2 (BEST)

X1 (WORST), X2 (WORST)
AND
p = 0.5

p = 0.5
X1 (BEST), X2 (WORST)

X1 (WORST), X2 (BEST)
p = 0.5
Conditions for Multi-attribute Utility
Function
If attributes 1 and 2 are mutually utility independent
and additive independent,

then the multi-attribute utility function is

u(x1,x2) = k1u1(x1) + k2u2(x2)

where k3 = 0
 EXAMPLE

STQM6034 Decision and Game Analysis

Example

 Suppose a company is considering introducing a

new product and wants to determine the price for
a unit of the product.

 The decision for the price per unit product is

influenced by the company’s market share and
profits.

 Let x1 be the level of market share (%) Attribute 1

 Let x2 be the level of profits (RM) Attribute 2
Example : Condition 1

 The company’s market share is utility

independent of profits

 If the company is neutral/indifferent towards the

two lotteries below:

0.5
10%, RM5 1.00
L1 AND L1’ 16%, RM5
30%, RM5
0.5
Example : Condition 1

 and if the company’s market share is utility

independent of profits, the company is also
neutral/indifferent towards the two lotteries
below:

0.5
10%, RM20 1.00
L2 AND L2’ 16%, RM20
30%, RM20
0.5
Example : Condition 1 Conclude

 If the company’s market share is utility

independent of profits ,
then
at any level of profits, there is a 0.50 probability
at 10% of market share, and 0.50 probability at
30% of market share
that give a certainty equivalent (CE) of the lottery
for 16% of market share.
Example : Condition 1 checked
0.5
10%, RM5 1.00
L1 AND L1’ 16%, RM5
30%, RM5
0.5

0.5
10%, RM20 1.00
L2 AND L2 ’ 16%, RM20
30%, RM20
0.5
Example : Condition 2

 The multi-attribute utility function is mutually

utility independent in which the company’s
market share is utility independent of profits, and
the company’s profits is utility independent of
market share.
 Example : Condition 2 Interpreted
 If the company is neutral/indifferent towards the two
lotteries L1 and L1’, then it is also neutral/indifferent
towards L2 and L2’.

 L1iL1’ shows:
E(u(L1)) = E(u(L1’))
0.5u(10%, RM5) + 0.5u(30%, RM5) = 1u(16%, RM5)
But
E(u(L1)) = 0.5 [ k1u1(10%) + k2u2(RM5) + k3u1(10%)u2(RM5)]
+ 0.5 [k1u1(30%) + k2u2(RM5) + k3u1(30%)u2(RM5)]

E(u(L1’)) = k1u1(16%) + k2u2(RM5) + k3u1(16%) u2(RM5)

Example : Condition 2 Interpreted

 This means:

E(u(L1)) = (0.5)k1[(u1(10%) + u1(30%)] +

(0.5)k3u2(RM5) [(u1(10%) + u1(30%)]
= k1u1(16%) + k3u2(RM5) u1(10%) = E(u(L1’))

 Therefore,
0.5 [u1(10%) + u1(30%)] = u1(16%)
 Example : Condition 2 Check
 If the attributes are utility independent, then the
decision maker must be indifferent towards L2 and
L2’

 Check if L2iL2’:
E(u(L2)) = E(u(L2’))

E(u(L2)) = E[0.5u(10%,RM20) + 0.5u(30%,RM20)]

= 0.5 [ k1u1(10%) + k2u2(RM20) + k3u1(10%)u2(RM20)]

+ 0.5 [k1u1(30%) + k2u2(RM20) + k3u1(30%)u2(RM20)]

= 0.5 k1u1(10%) + 0.5 k1u1(30%) + k2u2(RM20) +

0.5 k3u1(10%)u2(RM20) + 0.5 k3u1(30%)u2(RM20)
 Example : Condition 2 Conclude

Continue….
E(u(L2)) = k1[(0.5)(u1(10%) + u1(30%)] + k2u2(RM20)
+ k3u2(RM5)(0.5)[(u1(10%) + u1(30%)]
= k1u1(16%) + k2u2(RM20) + k3u1(16%) u2(RM20)
= E(u(L2’)) = RHS

Therefore proven L2iL2’ .

Hence, attributes 1 and 2 are mutually utility
independent.
Example : Condition 3

 If the company’s market share and profits are

additive independent, then

u(x1, x2) = k1u1(x1) + k2u2(x2)

 Only depends on u1(x1) and u2(x2), and NOT

u1(x1)u2(x2)
 Example : Condition 3 Recall
The multi-attribute utility function is additive
independent if the decision maker is
neutral/indifferent between the lotteries

0.5
X1 (BEST), X2 (BEST)
L
X1 (WORST), X2 (WORST)
AND
0.5

0.5
X1 (BEST), X2 (WORST)
L’
X1 (WORST), X2 (BEST)
0.5
Example : Condition 3 Check
 Let u1(x1(BEST)) = u2(x2(BEST)) = 1
u1(x1(WORST)) = u2(x2(WORST)) = 0

 Then, u(x1(BEST), x2(BEST))

= k1u1(x1(BEST)) + k2u2(x2(BEST)) +

k3u1(x1(BEST))u2(x2(BEST))
= k 1+ k 2+ k 3

 and u(x1(WORST), x2(WORST))

= k1u1(x1(WORST)) + k2u2(x2(WORST)) +

k3u1(x1(BEST))u2(x2(WORST))
=0
Example : Condition 3 Check

 So, find

u(x1(BEST), x2(WORST))
= k1u1(x1(BEST)) + k2u2(x2(WORST)) +

k3u1(x1(BEST))u2(x2(WORST))
= k1

and u(x1(WORST), x2(BEST))

= k1u1(x1(WORST)) + k2u2(x2(BEST)) +

k3u1(x1(WORST))u2(x2(BEST))
= k2
Example : Condition 3 Check
 Then check E(u(L)) = E(u(L’))

E(u(L)) = (0.5)u(x1(BEST), x2(BEST)) +

(0.5)u(x1(WORST), x2(WORST))
= (0.5)(k1+ k2+ k3) + (0.5)(0)
= (0.5)(k1+ k2+ k3)

and E(u(L’)) = (0.5)u(x1(BEST), x2(WORST)) +

(0.5)u(x1(WORST), x2(BEST))
= (0.5)k1 + (0.5) k2
= (0.5)(k1+ k2)

Hence, (0.5)(k1+ k2+ k3) = (0.5)(k1+ k2)

k3 = 0
Example : Concluded

 If the company’s market share and profits are

mutually utility independent AND additive
independent, then

u(x1, x2) = k1u1(x1) + k2u2(x2)

 STEPS TO OBTAIN
MULTI-ATTRIBUTE
UTILITY FUNCTION
u(x1,x2)

STQM6034 Decision and Game Analysis

Steps
1. Check if attribute 1 and attribute 2 are mutually
utility independent.
If YES, go to Step 2.
If NO, STOP.

2. Check for additive independency to determine if

k3 = 0 or k3  0.

3. Obtain the estimates for u1(x1) and u2(x2).

4. Determine the weights k1, k2 and k3 (if not

additive independent)
Steps continued
5. Check if the utility function is parallel or abides
with the preference/priority set by the decision
maker
a) Construct a few lotteries and set the ranks/priorities
using expected utility
b) Ask decision maker to rank/prioritize the lotteries
c) The utility function is said to be parallel/same as the
preference set by the decision maker if the ranks given to
the lotteries are close.
 EXAMPLE 2

STQM6034 Decision and Game Analysis

Example 2

 Attribute 1:
x1 = the level of market share (%) (10 – 50)
 Attribute 2:
x2 = the level of profits (RM) (5 – 30)
Example 2: Step 1

A. Check if attribute 1 is utility independent of

attribute 2

If attribute 1 is utility independent of attribute 2,

then for any value of x1 (a fixed value), the
decision maker is neutral towards 2 lotteries

0.5
10%, x2 1.00
AND CE(L1), x2
50%, x2
0.5

CE(L1) value is the same for

different (fixed) values of x2
Example 2: Step 1

B. Check if attribute 2 is utility independent of

attribute 1

If attribute 2 is utility independent of attribute 1,

then for any value of x2 (a fixed value), the
decision maker is neutral towards 2 lotteries

0.5
x1 RM15 1.00
AND x1, CE(L2)
x1, RM20
0.5

CE(L2) value is the same for

different (fixed) values of x1
Example 2: Step 1 conclude

Therefore,
Attribute 1 and attribute 2 are Mutually Utility
Independent
Example 2: Step 2

 Check if decision maker is neutral towards 2

lotteries

p = 0.5
50%, RM30
L1 AND
10%, RM5
p = 0.5

p = 0.5
50%, RM5
L2
10%, RM30
p = 0.5
Example 2: Step 2
 If decision maker is neutral towards 2 lotteries,
i.e. E(u(L1)) = E(u(L2)), then attributes 1 and 2 are
additive independent. Then,

u(x1, x2) = k1u1(x1) + k2u2(x2)

 If decision maker is NOT neutral towards the 2

lotteries i.e. E(u(L1))  E(u(L2)), then attributes 1
and 2 are NOT additive independent. Then

u(x1, x2) = k1u1(x1) + k2u2(x2) + k3u1(x1)u2(x2)

 For this case, let’s assume that the 2 attributes

are NOT additive independent.
Example 2: Step 3

Say for Attribute 1 Say for Attribute 2

u2(x2)
Example 2: Step 4

A. Determine k1 from u(x1(BEST),x2(WORST))

The decision maker must be neutral towards

k1
50%, RM30 1.00
AND 50%, RM5
10%, RM5
1 – k1

Let k1 = 0.6
Example 2: Step 4

B. Determine k2 from u(x1(WORST),x2(BEST))

The decision maker must be neutral towards

k2
50%, RM30 1.00
AND 10%, RM30
10%, RM5
1 – k2

Let k2 = 0.5
Example 2: Step 4

C. Then k3 = 1 – k1 – k2 = 1 – 0.6 – 0.5 = -0.1

Therefore the multi-attribute utility function is

u(x1, x2) = (0.6)u1(x1) + (0.5)u2(x2) – (0.1)u1(x1)u2(x2)

Example 2: Step 5

a) Construct a few lotteries and set the

ranks/priorities using expected utility.

b) Ask decision maker to rank/prioritize the

lotteries.

c) The utility function is said to be parallel/same

as the preference set by the decision maker if
the ranks given to the lotteries are close.
 APPLICATION OF
MULTI-ATTRIBUTE
UTILITY FUNCTION

STQM6034 Decision and Game Analysis

Example 2 Revisited
 Attribute 1:
x1 = the level of market share (%) (10 – 50)
 Attribute 2:
x2 = the level of profits (RM) (5 – 30)

S1
Small sized Big sized
S2 campaign campaign
Small sized
25%, RM16 15%, RM12
campaign
Big sized
35%, RM8 25%, RM10
campaign
Recall u1(x1)
Recall u2(x2)
u2(x2)

0.70
0.58
0.53
0.45

8 10 12 16 x2(RM)
Assumptions
1. x1 and x2 are mutually utility independent.
2. They are NOT additive independent.

 Then,
u(x1,x2) = k1u1(x1) + k2u2(x2) + k3u1(x1)u2(x2)

 Let k1 = 0.6, k2 = 0.5,

then k3 = 1 - k1 - k2
= 1 - 0.6 - 0.5 = -0.1
 Find utilities for all combinations

 u(25%,$16) = 0.6(0.375) + 0.5(0.7) - 0.1(0.375)(0.7)

= 0.549

 u(15%,$12) = 0.6(0.125) + 0.5(0.58) - 0.1(0.125)(0.58)

= 0.358

 u(35%, $8) = 0.6(0.75) + 0.5(0.45) - 0.1(0.75)(0.45)

= 0.641

 u(25%, $10) = 0.6(0.375) + 0.5(0.53) - 0.1(0.375)(0.53)

= 0.470
 Calculate the expected values

 E[u(Small sized campaign)] =

(0.5)u(25%,RM16) + (0.5)u(15%,RM12)
= (0.5)(0.549) + (0.5)(0.358)
= 0.454

 E[u(Big sized campaign)] =

(0.5)u(35%,RM8) + (0.5)u(25%,RM10)
= (0.5)(0.641) + (0.5)(0.470)
= 0.556

 THEREFORE, Should do a big sized campaign.