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Decision Analysis H

# Decision Analysis H - Decision Analysis Introduction to...

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1 Decision Analysis v Introduction to Decision Analysis. v Decision Rules v Decision Trees v Multistage Decisions v Expected value of perfect and sample information. v Using Precision Tree to solve multistage decision trees. v Sensitivity Analysis

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Decision Making
Decision Analysis v Decision analysis is can be used to determine optimal strategies when a decision maker is faced with several decision alternatives and an uncertain or risk filled pattern of future events. v It lets a manager consider the overall impact of a series of decisions and developing a strategy for handling them.

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Decision Analysis Examples: New product development, bidding for a contract, determining business and legal strategies v A decision problem is characterized by 1) decision alternatives 2) states of nature 3) resulting payoffs
Decision Analysis Requirements v Choice of alternatives - courses of action which are mutually exclusive and exhaustive {d 1 , d 2 , d 3 , …} v Varying states of nature and events - no control over, but able to assign probability values to. {s 1 , s 2 , s 3 , …} v Measurements of payoffs of choices and events. v An objective.

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Four Steps v Structure Problem v Make Assessments v Decision v Sensitivity Analysis
Structuring the Decision Problem v Identify decision alternatives The decision alternatives are the different possible strategies the decision maker can employ. v Define possible states of nature The states of nature refer to future events, not under the control of the decision maker. States of nature should be mutually exclusive and collectively exhaustive. v Estimate the resulting payoff for each combination of a decision alternative and a state of nature Payoffs are often displayed in a payoff table .

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Payoff Table v Payoff: Measurement of the outcome that results from a specific decision alternative and the occurrence of a particular state of nature. v Entries in the payoff table can be profit, cost, time, distance.
Example 1 v A department store wants to determine how much to order from a toy company for the Christmas season. v The manufacturer sells toys in lots of size 1000 at a price of \$2000 per lot. v The store considers ordering 1, 2 or 3 lots. The demand can be high (3 lots), medium (2 lots) or low (1 lot). The department store will sell each lot for \$4000 if there is sufficient demand.

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Decision Analysis H - Decision Analysis Introduction to...

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