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Chapter06slides - 11 Utility function for product...

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Decision Making under Uncertainty 1
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The maximin criterion 2
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The Expected Monetary Value (EMV) criterion 3
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Calculating expected profits Produce one batch : Expected daily profit = (0.3 × $200) + (0.7 × $200) = $200 Produce two batches : Expected daily profit = (0.3 × –$600) + (0.7 × $400) = $100 4
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Sensitivity analysis 5
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Limitations of the EMV criterion It assumes that the decision maker is neutral to risk It assumes a linear value function for money It considers only one attribute - money 6
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Single-attribute utility: A decision tree for the conference organizer 7
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Applying utilities to the conference organizer’s decision 8
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A utility function for the conference organizer - indicating she is risk averse 9
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Interpreting utility functions 10
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The drug company research department’s problem
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Unformatted text preview: 11 Utility function for product development time 12 Allais’s paradox 13 Multi-attribute Utility 14 Utility independence Attribute A is utility independent of attribute B, if the decision maker’s preferences for gambles involving different levels of A, but the same level of B, do not depend on the level of attribute B… 15 Utility independence 16 Utility functions for overrun time and project cost 17 The project manager’s utilities for overrun and cost 18 Multi-attribute utility function u ( x 1 , x 2 ) = k 1 u ( x 1 ) + k 2 u ( x 2 ) + k 3 u ( x 1 ) u ( x 2 ) where: k 3 = 1– k 1 – k 2 19 Determining k 1 20 Determining k 2 21 The project manager’s decision tree with utilities 22...
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