Chapter 15 @Risk - Spreadsheet Modeling & Decision...

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Unformatted text preview: Spreadsheet Modeling & Decision Analysis A Practical Introduction to Management Science 5 th edition Cliff T. Ragsdale Decision Analysis Chapter 15 Introduction to Decision Analysis Models help managers gain insight and understanding, but they can’t make decisions. Decision making often remains a difficult task due to: – Uncertainty regarding the future – Conflicting values or objectives Consider the following example... Deciding Between Job Offers Company A – In a new industry that could boom or bust. – Low starting salary, but could increase rapidly. – Located near friends, family and favorite sports team. Company B – Established firm with financial strength and commitment to employees. – Higher starting salary but slower advancement opportunity. – Distant location, offering few cultural or sporting activities. Which job would you take? Good Decisions vs. Good Outcomes A structured approach to decision making can help us make good decisions, but can’t guarantee good outcomes. Good decisions sometimes result in bad outcomes. Characteristics of Decision Problems Alternatives - different courses of action intended to solve a problem. – Work for company A – Work for company B – Reject both offers and keep looking Criteria - factors that are important to the decision maker and influenced by the alternatives. – Salary – Career potential – Location States of Nature - future events not under the decision makers control. – Company A grows – Company A goes bust – etc An Example: Magnolia Inns Hartsfield International Airport in Atlanta, Georgia, is one of the busiest airports in the world. It has expanded many times to handle increasing air traffic. Commercial development around the airport prevents it from building more runways to handle future air traffic. Plans are being made to build another airport outside the city limits. Two possible locations for the new airport have been identified, but a final decision will not be made for a year. The Magnolia Inns hotel chain intends to build a new facility near the new airport once its site is determined. Land values around both possible sites for the new airport are increasing as investors speculate that property values will increase greatly in the vicinity of the new airport. See data in file Fig15-1.xls The Decision Alternatives 1) Buy the parcel of land at location A. 2) Buy the parcel of land at location B. 3) Buy both parcels. 4) Buy nothing. The Possible States of Nature 1) The new airport is built at location A. 2) The new airport is built at location B. Constructing a Payoff Matrix See file Fig15-1.xls Decision Rules If the future state of nature (airport location) were known, it would be easy to make a decision....
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This note was uploaded on 04/06/2012 for the course BUSINESS CS204, Eco taught by Professor Mr during the Spring '12 term at American University of Beirut.

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Chapter 15 @Risk - Spreadsheet Modeling & Decision...

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