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© Yanbu University College YANBU UNIVERSITY COLLEGE Women’s Campus © Yanbu University College Decision Analysis Chapter3
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© Yanbu University College Learning Objectives 1. List the steps of the decision-making process 2. Describe the types of decision-making environments 3. Make decisions under uncertainty 4. Use probability values to make decisions under risk 5. Develop accurate and useful decision tree After completing this chapter, students will be able to:
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© Yanbu University College Chapter Outline 3.1 Introduction 3.2 The Six Steps in Decision Making 3.3 Types of Decision-Making Environments 3.4 Decision Making under Uncertainty 3.5 Decision Making under Risk 3.6 Decision Trees
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© Yanbu University College Example Panda is Planning to start new product in market.
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© Yanbu University College Example Loss, Profit Use model Take decision STATE OF NATURE ALTERNATIVE Profit ($) Loss($) Sugar 200,000 –180,000 Rice 100,000 –20,000 Oil 10000 -3000
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© Yanbu University College Diagram Need/Problem Alternatives Out Comes Profit Model Decision
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© Yanbu University College Introduction What is involved in making a good decision? Decision theory is an analytic and systematic approach to the study of decision making A good decision is one that is based on logic, considers all available data and possible alternatives, and the quantitative approach described here
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© Yanbu University College The Six Steps in Decision Making 1. Clearly define the problem at hand 2. List the possible alternatives 3. Identify the possible outcomes or states of nature 4. List the payoff or profit of each combination of alternatives and outcomes 5. Select one of the mathematical decision theory models 6. Apply the model and make your decision
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© Yanbu University College Thompson Lumber Company Step 1 – Define the problem Expand by manufacturing and marketing a new product Step 2 – List alternatives Construct a large new plant A small plant No plant at all Step 3 – Identify possible outcomes The market could be favorable or unfavorable
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© Yanbu University College Thompson Lumber Company Step 4 – List the payoffs Identify conditional values for the profits for large, small, and no plants for the two possible market conditions Step 5 – Select the decision model Depends on the environment and amount of risk and uncertainty Step 6 – Apply the model to the data Solution and analysis used to help the decision making
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© Yanbu University College Thompson Lumber Company STATE OF NATURE ALTERNATIVE FAVORABLE MARKET ($) UNFAVORABLE MARKET ($) Construct a large plant 200,000 –180,000 Construct a small plant 100,000 –20,000 Do nothing 0 0 Table 3.1
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© Yanbu University College Types of Decision-Making Environments Type 1: Decision making under certainty Decision maker knows with certainty the consequences of every alternative or decision choice Type 2: Decision making under uncertainty The decision maker does not know the probabilities of the various outcomes Type 3: Decision making under risk The decision maker knows the probabilities of the various outcomes
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