Business Analysis

Lecture Outline

       Decision Analysis Decision Making without Probabilities Decision Analysis with Excel Decision Analysis with OM Tools Decision Making with Probabilities Expected Value of Perfect Information Sequential Decision Tree

Supplement 1-1

Copyright 2009 John Wiley & Sons, Inc.

Decision Analysis

 Quantitative methods

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a set of tools for operations manager a set of quantitative decision-making techniques for decision situations in which uncertainty exists Example of an uncertain situation

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 Decision analysis

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demand for a product may vary between 0 and 200 units, depending on the state of market

Copyright 2009 John Wiley & Sons, Inc.

Supplement 1-2

Decision Making Without Probabilities

 States of nature

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Events that may occur in the future Examples of states of nature:

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high or low demand for a product good or bad economic conditions

 Decision making under risk

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probabilities can be assigned to the occurrence of states of nature in the future probabilities can NOT be assigned to the occurrence of states of nature in the future

Supplement 1-3

 Decision making under uncertainty

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Copyright 2009 John Wiley & Sons, Inc.

Payoff Table

 Payoff table

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method for organizing and illustrating payoffs from different decisions given various states of nature

 Payoff

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outcome of a decision

States Of Nature Decision a b 1 Payoff 1a Payoff 1b 2 Payoff 2a Payoff 2b

Copyright 2009 John Wiley & Sons, Inc. Supplement 1-4

Decision Making Criteria Under Uncertainty

 Maximax

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choose decision with the maximum of the maximum payoffs

 Maximin

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choose decision with the maximum of the minimum payoffs choose decision with the minimum of the maximum regrets for each alternative

Supplement 1-5

 Minimax regret

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Copyright 2009 John Wiley & Sons, Inc.

Decision Making Criteria Under Uncertainty (cont.)

 Hurwicz

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choose decision in which...