Chapter12-DecisionAnalysis1Chapter12DecisionAnalysisIntroductiontoManagementScience8thEditionbyBernardW.TaylorIIIChapter12-DecisionAnalysis2ComponentsofDecisionMakingDecisionMakingwithoutProbabilitiesDecisionMakingwithProbabilitiesDecisionAnalysiswithAdditionalInformationUtilityChapterTopicsChapter12-DecisionAnalysis3Table12.1PayoffTableAstateofnatureisanactualeventthatmayoccurinthefuture.Apayofftableisameansoforganizingadecisionsituation,presentingthepayoffsfromdifferentdecisionsgiventhevariousstatesofnature.DecisionAnalysisComponentsofDecisionMakingChapter12-DecisionAnalysis4Decisionsituation:•Decision-MakingCriteria:maximax,maximin,minimax,minimaxregret,Hurwicz,andequallikelihoodTable12.2PayoffTablefortheRealEstateInvestmentsDecisionAnalysisDecisionMakingwithoutProbabilitiesChapter12-DecisionAnalysis5Table12.3PayoffTableIllustratingaMaximaxDecisionInthemaximaxcriterionthedecisionmakerselectsthedecisionthatwillresultinthemaximumofmaximumpayoffs;anoptimisticcriterion.DecisionMakingwithoutProbabilitiesMaximaxCriterionChapter12-DecisionAnalysis6Table12.4PayoffTableIllustratingaMaximinDecisionInthemaximincriterionthedecisionmakerselectsthedecisionthatwillreflectthemaximumoftheminimumpayoffs;apessimisticcriterion.DecisionMakingwithoutProbabilitiesMaximinCriterionChapter12-DecisionAnalysis7Table12.6RegretTableIllustratingtheMinimaxRegretDecisionRegretisthedifferencebetweenthepayofffromthebestdecisionandallotherdecisionpayoffs.Thedecisionmakerattemptstoavoidregretbyselectingthedecisionalternativethatminimizesthemaximumregret.DecisionMakingwithoutProbabilitiesMinimaxRegretCriterionChapter12-DecisionAnalysis8TheHurwiczcriterionisacompromisebetweenthemaximaxandmaximincriterion.Acoefficientofoptimism,,isameasureofthedecisionmaker’soptimism.TheHurwiczcriterionmultipliesthebestpayoffbyandtheworstpayoffby1-.,foreachdecision,andthebestresultisselected.DecisionValuesApartmentbuilding$50,000(.4)+30,000(.6)=38,000Officebuilding$100,000(.4)-40,000(.6)=16,000Warehouse$30,000(.4)+10,000(.6)=18,000DecisionMakingwithoutProbabilitiesHurwiczCriterionChapter12-DecisionAnalysis9Theequallikelihood(orLaplace)criterionmultipliesthedecisionpayoffforeachstateofnaturebyanequalweight,thusassumingthatthestatesofnatureareequallylikelytooccur.DecisionValuesApartmentbuilding$50,000(.5)+30,000(.5)=40,000Officebuilding$100,000(.5)-40,000(.5)=30,000Warehouse$30,000(.5)+10,000(.5)=20,000DecisionMakingwithoutProbabilitiesEqualLikelihoodCriterionChapter12-DecisionAnalysis10Adominantdecisionisonethathasabetterpayoffthananotherdecisionundereachstateofnature.Theappropriatecriterionisdependentonthe“risk”personalityandphilosophyofthedecisionmaker.CriterionDecision(Purchase)MaximaxOfficebuildingMaximinApartmentbuildingMinimaxregretApartmentbuildingHurwiczApartmentbuildingEquallikelihoodApartmentbuildingDecisionMakingwithoutProbabilitiesSummaryofCriteriaResultsChapter12-DecisionAnalysis11Exhibit12.1DecisionMakingwithoutProbabilitiesSolutionwithQMforWindows(1of3)Chapter12-DecisionAnalysis12Exhibit12.2DecisionMakingwithoutProbabilitiesSolutionwithQMforWindows(2of3)Chapter12-DecisionAnalysis13Exhibit12.3DecisionMakingwithoutProbabilitiesSolutionwithQMforWindows(3of3)Chapter12-DecisionAnalysis14Expectedvalueiscomputedbymultiplyingeachdecisionoutcomeundereachstateofnaturebytheprobabilityofitsoccurrence.EV(Apartme...