STEP 1: Fundamental and Means Objectives
Objectives can be classified as means or fundamental. Fundamental objectives are what the
decision-maker really wants to accomplish. These are the basis by which the consequences will
be measured. Means objectives
Case Study: Southern Electronics, Part I
Steve Sheffler is president, CEO, and majority stockholder of Southern Electronics, a small firm
in the town of Silicone Mountain. Steve faces a major decision. Two firms, Big Red Business
Machines and Banana Compu
The next step is to decompose problems in order to understand their structures and measure
uncertainty and value. Decomposition is the key to decision analysis. The approach used is
divide and conquer. The first level of decomposition is structuring the p
understand the relationships among multiple objectives. We will assess utility functions in order
to model the way in which decision maker value different outcomes and trade off competing
Once the model has been developed, we would choose the
No we need to compare each alternative based on the lowest level in your hierarchy of decision
-Access to Java Jolt
-Access to Cuppa Jo
-Route A is somewhat faster than Route B. Score = 3.
-Route A is very much faster than
Lets revisit the definitions of Decision Path and Strategy that we just went through not long ago.
A path starting at the left most node up to the values at the end of a branch by selecting one
alternative from decision nodes or by followin
back to Banana for $30 per share anytime within the next year (during which time it will become
known whether EYF succeeds or fails.)
1. Calculate Steves expected value for the deal. Ignore tax effects and time value of money.
2. The cost to Ba
Building group creativity is very important for successful organizations and several formal
methods are outlined below.
Brainstorming is very important in group creativity. This is when group members introduce all
possible solutions befor
Sometimes we may have to use attribute scale to measure our objectives. For example, how does
one measure quality? One solution is to define an attribute scale: BEST, BETTER,
SATISFACTORY, WORSE, WORST.
Again, each category needs to pass the Clarity Test:
one risk profile over another. Dominance is used to help us identify those profiles and their
associated strategies that can be ignored. Such strategies are said to be dominated because we
can use some rules relating to cumulative risk profiles to logical
Note that for all possible values of x:
Pr(Outcome x| Firm B)
Pr(Outcome x| Firm A)
Pr(Outcome x| Firm B)
Pr(Outcome x| Firm A)
Hence the chances of winning with Firm B are always better than that of Firm A.
Conclusion: Firm B stochasti
We can create a tree like the one shown below.
To link the tree Click the root cell Mail Order and under Calculation tab, change the method
to Linked Spreadsheet and make it Automatic update. Link the total cell $253.75 (cell B5) as the
default cell. See
The linked tree is shown above with all the formulas included in the calculations.
Making Decisions with Multiple Objectives
So far we have only focused on a single-objective decision. How would we deal with a decision
if it has multiple object
Using expected value to compare different risky prospects is useful but EMV can sometimes
inadequately captures the nature of the risks that must be compared. With risk profiles, we can
make a more comprehensive comparison of the risks, but we s
Analysis of a multiple objective decision is to calculate the expected value or create the risk
profile for each individual objective. Lets do this analysis for our summer job example.
Analysis: Salary Objective
Some of the questions that need to be considered in classifying objectives are summarized in
following table (page 52 in the textbook). It is important to note that Decision Problems are
evaluated using only the Fundamental Objective Hierarchy.
In order t
To calculate the weights of individual criteria add the individual columns and divide each
element by the total in the corresponding column and average them across each row,
This weighted score suggests the following:
-Commute time represents about 61% of
The solved decision tree for Liedtke is shown below. This decision tree implies that Liedtke
should turn down Texacos offer but counteroffer a settlement of $5 billion. If Texaco turns
down the $5 billion and makes another counteroffer of $3 billion, Lied
See influence diagrams as flow charts.
Many chance nodes going into the immediate decision node to reflect uncertainty.
The inclusion of cycles.
Some general points about decision trees:
1. Decision Trees are evaluated from left to right.
2. Only one alt
The following are the steps in the Delphi technique:
1. Formation of a team to undertake and monitor a Delphi on a given subject.
2. Selection of one or more panels to participate in the exercise. Customarily, the panelists
are experts in the area to be i
Lesson 1: The Foundation of DecisionMaking Process
Decisions are made on a daily basis. Some are major and some are minor. Most people have poor
skills in the area of decision making. It becomes normal to take the wait and hope position t
For example, consider a case where you have to choose between two risky alternatives of a game
of chance (lottery). You have a ticket that will pay off $10 with a 45% chance, and nothing with
a 55% chance. Your friend on the other hand has a tick
Enter your answer here
Lets go back to Texaco-Pennzoil case.
How many decision strategies do we have in the Texaco Penzoil decision tree? Let us look at
the decision strategies and the corresponding risk profile.
Risk Profiles and Cumulative Risk Profiles
the decisions and the circles represent chance events. The branches emanating from a square
correspond to the choices available to the decision maker and the branches from the circle
represent the possible outcomes of a chance event.
The attached PDF docu
Broadly these can be classified as structural, emotional and organizational. The decision making
process reduces the amount of complexity, uncertainty and doubt about the uncontrollable part of
the input. Obtain reliable, meaningful and accurate informati