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Chapter 14
Decision Analysis
Learning Objectives
1.
Learn how to describe a problem situation in terms of decisions to be made, chance events and
consequences.
2.
Be able to analyze a simple decision analysis problem from both a payoff table and decision tree
point of view.
3.
Be able to develop a risk profile and interpret its meaning.
4.
Be able to use sensitivity analysis to study how changes in problem inputs affect or alter the
recommended decision.
5.
Be able to determine the potential value of additional information.
6.
Learn how new information and revised probability values can be used in the decision analysis
approach to problem solving.
7.
Understand what a decision strategy is.
8.
Learn how to evaluate the contribution and efficiency of additional decision making information.
9.
Be able to use a Bayesian approach to computing revised probabilities.
10.
Know what is meant by utility.
11.
Understand why utility could be preferred to monetary value in some situations.
12.
Be able to use expected utility to select a decision alternative.
13.
Be able to use TreePlan software for decision analysis problems.
14.
Understand the following terms:
decision alternatives
decision strategy
chance events
risk profile
states of nature
sensitivity analysis
influence diagram
prior probabilities
payoff table
posterior probabilities
decision tree
expected value of sample information (EVSI)
optimistic approach
efficiency of sample information
conservative approach
Bayesian revision
minimax regret approach
utility
opportunity loss or regret
lottery
expected value approach
expected utility
expected value of perfect information (EVPI)
Solutions:
14  1
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1.
a.
s
1
s
3
s
2
s
1
s
3
s
2
d
1
d
2
250
100
25
100
100
75
b.
Decision
Maximum Profit
Minimum Profit
d
1
250
25
d
2
100
75
Optimistic approach: select
d
1
Conservative approach: select
d
2
Regret or opportunity loss table:
s
1
s
2
s
3
d
1
0
0
50
d
2
150
0
0
Maximum Regret:
50 for
d
1
and 150 for
d
2
; select
d
1
2.
a.
Decision
Maximum Profit
Minimum Profit
d
1
14
5
d
2
11
7
d
3
11
9
d
4
13
8
Optimistic approach: select
d
1
Conservative approach: select
d
3
Regret or Opportunity Loss Table with the Maximum Regret
s
1
s
2
s
3
s
4
Maximum
Regret
14  2
Decision Analysis
d
1
0
1
1
8
8
d
2
3
0
3
6
6
d
3
5
0
1
2
5
d
4
6
0
0
0
6
Minimax regret approach:
select
d
3
b.
The choice of which approach to use is up to the decision maker.
Since different approaches can
result in different recommendations, the most appropriate approach should be selected before
analyzing the problem.
c.
Decision
Minimum
Cost
Maximum Cost
d
1
5
14
d
2
7
11
d
3
9
11
d
4
8
13
Optimistic approach: select
d
1
Conservative approach: select
d
2
or
d
3
Regret or Opportunity Loss Table
s
1
s
2
s
3
s
4
Maximum
Regret
d
1
6
0
2
0
6
d
2
3
1
0
2
3
d
3
1
1
2
6
6
d
4
0
1
3
8
8
Minimax regret approach: select
d
2
3.
a.
The decision to be made is to choose the best plant size.
There are 2 alternatives to choose from:
a
small plant or a large plant.
The chance event is the market demand for the new product line.
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This note was uploaded on 01/17/2010 for the course MATH 2310 taught by Professor Shakroh during the Spring '09 term at Langara.
 Spring '09
 shakroh
 Math, Decision Analysis

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