OMIS 327 Lecture 2. Decision Analysis

# OMIS 327 Lecture 2. Decision Analysis - OMIS 327 Lecture 2...

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1 OMIS 327 Lecture 2: Decision Analysis Instructor: Dr. Lee, Jung Young

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2 Announcement Your introduction with a picture of yours ! Use the introduction submission link at BB Name, major, and anything else..
3 Today’s Learning Goals Types of decision making environments Decision Trees

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4 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.
5 Components of a Decision Problem Decision Alternatives: Choice States of Nature: Chance Certainty Risk Uncertainty Outcomes (Payoffs): Consequence Choice(decision) + Chance = Consequences Plant Location Demand Profit

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6 Six Steps in Decision Making: Thompson Lumber Company Step 1 – Step 1 – Define the problem. The company is considering expanding by manufacturing and marketing a new product – backyard storage sheds. Step 2 – Step 2 – List possible alternatives. Construct a large new plant. Construct a small new plant. Do not develop the new product line at all. Step 3 – Step 3 – Identify possible outcomes or states of nature. The market could be favorable or unfavorable.
7 Thompson Lumber Company Step 4 – Step 4 – List the payoffs. Identify conditional values conditional values for the profits for large plant, small plant, and no development for the two possible market conditions. Step 5 – Step 5 – Select the decision model. This depends on the environment and amount of risk and uncertainty. Step 6 – Step 6 – Apply the model to the data. Solution and analysis are then used to aid in decision-making.

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8 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 Condition Values (Payoffs) here are Profits! Decision Table with Conditional Values for Thompson Lumber
9 Types of Decision-Making Environments Type 1: Type 1: Decision making under certainty The decision maker knows with certainty knows with certainty the consequences of every alternative or decision choice.

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• Spring '14
• JungYoungLee
• EMV

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