Unit 10 Decision Analysis - Basics_1

Unit 10 Decision Analysis - Basics_1 - 10-1 Copyright...

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Unformatted text preview: 10-1 Copyright 1999-2010 by R. E. Wendell. Unit 10 Decision Analysis - Basics 10-2 Copyright 1999-2010 by R. E. Wendell. Relation to Ragsdale As in Ragsdale we will use TreePlan as the supporting software for decision analysis. This software is an EXCEL add-in and can be found on the CD in Ragsdale. See pages 742-750 for how-to-use instructions. Example 1 is similar to the Magnolia Inns problem-- see pp 725-728. Examples 2, 3 and 4 are similar to the OSHA problem on pp 750-760 in that they are all multistage problems. 10-3 Copyright 1999-2010 by R. E. Wendell. Single-Stage versus Multiple-Stage Decisions Single stage decision Many practical decisions have multiple stages Decision Analysis is particularly useful for multi-stage decisions Model Decision Alternatives Info. about Uncertainty Uncertainty resolves Terminal Payoff Stage 1 Model Decision 1 Alternatives Info. about Uncertainty Stage 2 Model Decision 2 Alternatives Info about Uncertainty Uncertainty resolves 10-4 Copyright 1999-2010 by R. E. Wendell. Ex 1: Premium Audio with Probabilities Suppose probabilities are: State of Nature Probability Recessionary Economy 0.2 Neutral Economy 0.4 Growth Economy 0.4 10-5 Copyright 1999-2010 by R. E. Wendell. Decision Tree Terminal Values Low Recessionary Prob = 0.2 Neutral Prob = 0.4 Growth Prob = 0.4 Medium High Decision Node (Rectangle) Chance Node (Circle) $ 50,000 $ 120,000 $ 80,000 Recessionary Prob = 0.2 Neutral Prob = 0.4 Growth Prob = 0.4 $ 200,000 $ 140,000 $ 20,000 Recessionary Prob = 0.2 Neutral Prob = 0.4 Growth Prob = 0.4 $ 220,000 $ 120,000 $ -40,000 Recessionary Prob = 0.2 Neutral Prob = 0.4 Growth Prob = 0.4 $ 75,000 $ 75,000 $ 75,000 Exit Market 10-6 Copyright 1999-2010 by R. E. Wendell. Interpreting the Schematic- decision node whose branches denote decision choices- chance node where branches denote uncertain events Tree- denoted possible paths of decision nodes and chance nodes Terminal value - denotes a measure of the payoff of the decisions and outcomes along a path 10-7 Copyright 1999-2010 by R. E. Wendell. Decision Tree (with Expected Profits) Terminal Values Low Recessionary Prob = 0.2 Neutral Prob = 0.4 Growth Prob = 0.4 Medium High Decision Node (Rectangle) Chance Node (Circle) $ 50,000 $ 120,000 $ 80,000 $ 140,000 $ 128,000 Recessionary Prob = 0.2 Neutral Prob = 0.4 Growth Prob = 0.4 $ 200,000 $ 140,000 $ 20,000 $ 90,000 Recessionary Prob = 0.2 Neutral Prob = 0.4 Growth Prob = 0.4 $ 220,000 $ 120,000 $ -40,000 Recessionary...
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This note was uploaded on 12/23/2010 for the course BUSQOM 0050 taught by Professor Glowackia during the Spring '08 term at Pittsburgh.

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Unit 10 Decision Analysis - Basics_1 - 10-1 Copyright...

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