Decision Criteria

Reference:
Winston, W.L. & Goldberg, J.B. (2004). Operations research: applications and algorithms (Vol 4).
BelmonteCalif Calif:Thomson/Brooks/Cole.

Chapter 13.1
Your Logo or Name Here
 Introduction to decision analysis

Outline The state-of-the-world decision-making model.

Four decision criteria

Your Logo or Name Here

Decision Analysis

❑ A method for reducing uncertainty in decision making process through

data analysis.
❑ Provides a rational process for making decision that is (usually) far
better than random selection.
❑ Easy to update if conditions change.

Your Logo or Name Here

Four decision criteria

▪ Decision making (without probabilities)

❑ Maximin
❑ Maximax
❑ Minimax Regret

▪ Decision making (with probabilities)

❑ Expected Value

Your Logo or Name Here

 Introduction to decision analysis

Outline The state-of-the-world decision-making model.

Four decision criteria

Your Logo or Name Here

The state-of-the-world decision-making model.

• The decision maker first chooses an action • Reward (Payoff) Tables

𝑎𝑖 from a set 𝐴 = 𝑎1 , 𝑎2 , … , 𝑎𝑘 of available
actions. State of the world
• Then the state of the world is observed; Action 𝑠1 𝑠2 …… 𝑠𝑛
with probability 𝑝𝑗 , the state of the world is 𝑎1 𝑟11 𝑟12 …… 𝑟1n
observed to be 𝑠𝑗 ∈ 𝑆 = 𝑠1 , 𝑠2 , . . , 𝑠𝑛 . 𝑎2 𝑟21
• If action 𝑎𝑖 is chosen and the state of the …… …..
world is 𝑠𝑗 , the decision maker receives a 𝑎k 𝑟k1 𝑟kn
reward 𝑟𝑖𝑗 .

Your Logo or Name Here

Example Newspaper Vendor
❑ News vendor Phyllis Pauley sells newspapers at the corner of Kirkwood Avenue
and Indiana Street, and each day she must determine how many newspapers to
order.
❑ Phyllis knows that each day she can sell between 6 and 10 papers, with each
possibility being equally likely.
❑ Phyllis pays the company 20¢ for each paper and sells the papers for 25¢ each.
❑ Newspapers that are unsold at the end of the day are worthless.
❑ Show how this problem fits into the state-of-the-world model.

❑ Available action (number of paper ordered) for Phyllis to choose.

❑ S = {6, 7, 8, 9, 10} → the possible values of the daily demand for newspapers .
1
❑ 𝑝6 = 𝑝7 = 𝑝8 = 𝑝9 = 𝑝10 =
5 Your Logo or Name Here
Example Newspaper Vendor (1)
❑ S = {6, 7, 8, 9, 10} → the possible values of the daily demand for
newspapers .
1
❑ 𝑝6 = 𝑝7 = 𝑝8 = 𝑝9 = 𝑝10 =
5
❑ Alternative action (the number of papers to order each day).
A = {6, 7, 8, 9, 10}.
❑ If Phyllis purchases i papers and j papers are demanded, then i papers
are purchased at a cost of 20i¢, and min(i, j) papers are sold for 25¢ each.
❑ Thus, if Phyllis purchases i papers and j papers are demanded, Phyllis
earns a net profit of rij, where
rij = 25i - 20i = 5i for (i ≤ j)
rij = 25j - 20i for (i ≥ j)
Your Logo or Name Here
Reward Table for Newspaper Vendor

Paper Demanded (sj)

Paper A = {6, 7, 8, 9, 10}.
6 7 8 9 10
Ordered (ai)
S = {6, 7, 8, 9, 10}
6 30 30 30 30 30
7 10 35 35 35 35 rij = 25i - 20i = 5i for (i ≤ j)
8 -10 15 40 40 40 rij = 25j - 20i for (i ≥ j)
9 -30 -5 20 45 45
10 -50 -25 0 25 50

❑ Why not order less than 6 or more than 10? → dominated actions.
Your Logo or Name Here
 Dominated Actions

❑ An action ai is dominated by an Paper Demanded

action ai’ if: Paper
6 7 8 9 10
❑ for all 𝑠𝑗 ∈ 𝑆, rij ≤ ri’j, and Ordered
❑ for some state sj, rij’ < ri’j’. 1 5 5 5 5 5
2 10 10 10 10 10
i 3 15 15 15 15 15
❑ If action ai is dominated, there is no 4 20 20 20 20 20
5 25 25 25 25 25
reason to choose ai (ai’ would be a
better choice).

❑ Newspaper vendor example.

Your Logo or Name Here

 Dominated Actions (2)

❑ An action ai is dominated by an Paper Demanded

action ai’ if: Paper
6 7 8 9 10
❑ for all 𝑠𝑗 ∈ 𝑆, rij ≤ ri’j, and Ordered
❑ for some state sj, rij’ < ri’j’. 1 5 5 5 5 5
2 10 10 10 10 10
❑ If action ai is dominated, there is no i 3 15 15 15 15 15
reason to choose ai (ai’ would be a 4 20 20 20 20 20
better choice). 5 25 25 25 25 25
i’ 6 30 30 30 30 30
❑ Newspaper vendor example: 7 10 35 35 35 35
Ordering 6 papers dominates ordering i 8 -10 15 40 40 40
papers (i = 1, 2, 3, 4, 5). 9 -30 -5 20 45 45
10 -50 -25 0 25 50

Your Logo or Name Here

 Dominated Actions (3)

❑ Proof that in Newspaper vendor Paper Demanded

example, Paper
6 7 8 9 10
Ordering 10 papers dominates Ordered
ordering i papers (i ≥ 11 papers). 6 30 30 30 30 30
7 10 35 35 35 35
8 -10 15 40 40 40
❑ An action ai is dominated by an 9 -30 -5 20 45 45
i’ 10 -50 -25 0 25 50
action ai’ if:
11 -70 -45 -20 5 30
❑ for all 𝑠𝑗 ∈ 𝑆, rij ≤ ri’j, and
12 -90 -65 -40 -15 10
❑ for some state sj, rij’ < ri’j’. i 13 -110 -85 -60 -35 -10
14 -130 -105 -80 -55 -30
15 -150 -125 -100 -75 -50

Your Logo or Name Here

 Dominated Actions (4)

❑ Newspaper vendor example:

❑ Ordering 6 papers dominates ordering
i papers (i = 1, 2, 3, 4, 5).
Paper Demanded
❑ Ordering 10 papers dominates
ordering i papers (i ≥ 11 papers). Paper
6 7 8 9 10
Ordered
❑ A quick check shows that none of the 6 30 30 30 30 30
actions in A {6, 7, 8, 9, 10} are 7 10 35 35 35 35
dominated. 8 -10 15 40 40 40
9 -30 -5 20 45 45
❑ Thus, actions to choose is 10 -50 -25 0 25 50
A= {6, 7, 8, 9, 10}.

Your Logo or Name Here

Decision Criteria
-Four decision criteria-

Your Logo or Name Here

 Introduction to decision analysis

Outline The state-of-the-world decision-making model.

Four decision criteria

Your Logo or Name Here

Four decision criteria

▪ Decision making (without probabilities)

❑ Maximin
❑ Maximax
❑ Minimax Regret

▪ Decision making (with probabilities)

❑ Expected Value

Your Logo or Name Here

The Maximin Criterion

❑ Conservative or pessimistic approach.

❑ For each action, determine the worst outcome (smallest reward).
❑ Chooses the action with the “best” worst outcome.

❑ Chooses the action ai with the largest value of min 𝑗∈𝑆 𝑟𝑖𝑗 .

Your Logo or Name Here

The Maximin Criterion (2)

❑ For each action, determine the worst outcome (smallest reward).

❑ Chooses the action ai with the largest value of min 𝑗∈𝑆 𝑟𝑖𝑗 .
Paper Demanded (sj)
Smallest reward of
Paper Ordered
6 7 8 9 10 action i
(ai)
6 30 30 30 30 30 30 Choose the
7 10 35 35 35 35 10 maximum of
8 -10 15 40 40 40 -10 minimum
9 -30 -5 20 45 45 -30 reward.
10 -50 -25 0 25 50 -50 Best of the worst.

❑ Choose to order 6 papers.

Your Logo or Name Here
The Maximax Criterion

❑ Optimistic approach
❑ For each action, determine the best outcome (largest reward).
❑ Chooses the action with the “best” best outcome.

❑ Chooses the action ai with the largest value of max 𝑗∈𝑆 𝑟𝑖𝑗 .

Your Logo or Name Here

The Maximax Criterion (2)

❑ For each action, determine the best outcome (largest reward). .

❑ Chooses the action ai with the largest value of max 𝑗∈𝑆 𝑟𝑖𝑗 .
Paper Demanded (sj)
Largest reward of
Paper Ordered
6 7 8 9 10 action i
(ai)
6 30 30 30 30 30 30 Choose the
7 10 35 35 35 35 35 maximum of
8 -10 15 40 40 40 40 maximum
9 -30 -5 20 45 45 45 reward.
10 -50 -25 0 25 50 50 Best of the best.

❑ Choose to order 10 papers.

Your Logo or Name Here
Minimax Regret

❑ Uses the concept of opportunity loss to arrive at a decision.

❑ Steps:
1. For each possible state of the world sj, find an action i*( j) that
maximizes rij. That is, i*( j) is the best possible action to choose if the
state of the world is actually sj.
2. Then for any action ai and state sj, the opportunity loss or regret for ai in
sj is r i*( j), j – r ij.
3. Chooses an action by applying the minimax criterion to the regret
matrix.
❑ The minimax regret criterion attempts to avoid disappointment over
what might have been.
Your Logo or Name Here
 Minimax Regret (2)
1. For each possible state of the 2. Then for ai and sj, regret for ai in sj is r i*( j), j – r ij.
world sj, find an action i*( j)
that maximizes rij. Regret Table
Paper Demanded Paper Demanded
Paper 6 7 8 9 10 Paper 6 7 8 9 10
Ordered Ordered
6 30 30 30 30 30 6 30-30=0 5 10 15 20
7 10 35 35 35 35 7 30-10=20 0 5 10 15
8 -10 15 40 40 40 8 30- (-10)=40 20 0 5 10
9 -30 -5 20 45 45 9 30- (-30)=60 40 20 0 5
10 -50 -25 0 25 50 10 30-(-50)=80 60 40 20 0
i*( j) 6 7 8 9 10
r i*( j), j 30 35 40 45 50

Your Logo or Name Here

 Minimax Regret (3)

3. Chooses an action by applying the minimax criterion to the regret matrix.

Paper Demanded (sj)

Paper 6 7 8 9 10 Maximum
Ordered (ai) regret
6 0 5 10 15 20 20
7 20 0 5 10 15 20
Choose the minimum of
8 40 20 0 5 10 40
maximum regret.
9 60 40 20 0 5 60
10 80 60 40 20 0 80

❑ Choose ordering 6 or 7 papers

Your Logo or Name Here

 The Expected Value Criterion
❑ Chooses the action that yields the largest expected reward.
❑ Expected value of an action → 𝐸𝑉𝑎𝑖 = σ𝑛𝑗=1(𝑝𝑗 ∙ 𝑟𝑖𝑗 )

Paper Demanded (sj)

Paper Ordered EV of ai
6 7 8 9 10
(ai)
6 30 30 30 30 30 30
7 10 35 35 35 35 30 Choose the
maximum of
8 -10 15 40 40 40 25
expected
9 -30 -5 20 45 45 15 reward.
10 -50 -25 0 25 50 0
pj 0.2 0.2 0.2 0.2 0.2
❑ 𝐸𝑉𝑎1 = (0.2 ∙ 30)+ (0.2 ∙ 30)+ (0.2 ∙ 30)+ (0.2 ∙ 30)+ (0.2 ∙ 30)= 30
❑ 𝐸𝑉𝑎2 = (0.2 ∙ 10)+ (0.2 ∙ 35)+ (0.2 ∙ 35)+ (0.2 ∙ 35)+ (0.2 ∙ 35)= 30 Your Logo or Name Here
Terima Kasih
Yani Herawati
Program Studi Teknik Industri
UNPAR
yani.herawati@unpar.ac.id