Decision science

Sep 2022

Ans 1.

Introduction:

The gap between the maximum conceivable revenue for a state of nature and the exact
revenue realized for the specific action chosen is characterized as an opportunity loss. In a
nutshell, opportunity loss is the loss suffered as a result of failing to take the greatest potential
course of action or plan. Opportunity losses are computed independently for each possible
condition of nature. Therefore, for any state of nature, compute opportunity loss for the
specified plan of events and determine the differential amongst the maximum payoff and
payout for every plan of action for that state of nature. The conditional opportunity loss is
also known as the opportunity loss for every plan of action. The expected monetary value
(EMV) for every plan of events can be calculated using the rewards and possibilities of
various natural occurrences.

Source: https://qsstudy.com/wp-content/uploads/2018/07/Opportunity-Cost-3.jpg

A decision tree is a structured diagram like a graph that illustrates any potential outcome for
a given input using a branching mechanism. Decision trees can be hand-drawn or generated
using a graphics application or specialist software. Whenever a panel wants to evaluate and
make a judgement from various alternatives, decision trees can help concentrate onh the
debate. It could be used to portray conclusions and decision making graphically and
unambiguously. It employs a decision-tree-like model, asit suggests in the name itself. A
decision tree diagram is a form of flowchart that lays down the following routes of events
available to simplify decision-making. Decision trees also depict the various results of each
plan of events. Decision trees are fantastic techniques for assisting you in deciding amongst
multiple options. They give an efficacious structure for laying out choices and investigating
the potential results of those alternatives. Decision trees are built by iteratively assessing
distinctive aspects and using the trait that optimally separates the information at every node.
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The EMV for a specific course of action is the weighted average pay off, which is the
aggregate of the pay off for each permutation of paths and states of nature multiplied by the
likelihood of an event occurrence of each result. The expected monetary value (EMV) for
every plan of events can be calculated using the rewards and possibilities of various natural
occurrences. The EMV for a specific course of action is the weighted average pay off, which
is the aggregate of the pay off for each permutation of paths and states of nature multiplied by
the likelihood of an event occurrence of each result.
Formula:
Expected Monetary Value (EMV) = Probability * Impact

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Concept and Analysis:

Opportunity loss is the reduction suffered as a result of failing to choose the greatest potential
plan of events or technique. This choice category depends on the loss of an opportunity or
regret. The sum of money wasted due to not selecting the greatest option in a particular
condition of nature is referred to as opportunity loss or regret. The minimax regret criterion
uses the opportunity loss table to discover the option that minimises the maximum
opportunity loss in each alternatives.
 In a decision tree analysis, expected monetary value analysis makes things simpler to
estimate risks, estimate the contingency reserve, and find the optimum option. During this
procedure, the risk attitude should be neutral; else, the estimation may worsen. Furthermore,
the accuracy of this analysis is dependent on the input data. A complete data quality
evaluation should be carried out. This strategy boosts confidence in meeting the
organization's goal.
In projects, the Expected Monetary Value can be used to make comparisons of risks. It
computes the average outcome whenever the forecast contains unpredictable possibilities or
occurrencies, which can be either favourable (possibilities) or unfavorable (risks) (threats).
Risks are represented as negative numbers, while opportunities are represented as positive
numbers.

1. Opportunity Loss Table:

Payoff (profit
within one
month on one
unit of share
in INR Scenario 1 Scenario 2 Scenario 3 Scenario 4
Reliance
Industry ltd. 55 43 29 15
Maruti 26 38 43 51

Payoff (profit
within one
month on one
unit of share
in INR Scenario 1 Scenario 2 Scenario 3 Scenario 4
Reliance
Industry ltd. (55-55) (43-43) (43-29) (51-15)
Maruti (55-26) (43-38) (43-43) (51-51)
 Opportunity
Loss Table
Payoff (profit
within one
month on one
unit of share
in INR Scenario 1 Scenario 2 Scenario 3 Scenario 4
Reliance
Industry ltd. 0 0 14 36
Maruti 29 5 0 0

2. Decision Tree:
3. The four probabilities(states of nature) assigned from Niharika’s research are as
follows: P(s1) = 0.4 P(s2) = 0.1 P(s3) = 0.3 P(s4) = 0.2.

Expected monetary value for the decision alternative for Reliance Industry ltd.:

EMV for scenario 1= 55(0.4) = 22

EMV for scenario 2= 43(0.1) = 4.3
EMV for scenario 3= 29(0.3) = 8.7
EMV for scenario 4=15(0.2) = 3

The expected monetary value for investing in Reliance Industry Ltd. is Rs.38
 Expected monetary value for decision alternative for Maruti:

EMV for scenario 1= 26 (0.4)= 10.4

EMV for scenario 2= 38(0.1)= 3.8
EMV for scenario 3= 43(0.3)= 12.9
EMV for scenario 4= 51(0.2)= 10.2

The expected monetary value for investing in Reliance Industry Ltd. is Rs.37.3

A decision maker using expected monetary value will choose the maximum out of
expected monetary value for the decision:

Maximum of {38, 37.3} = 38

Conclusion:

Hence, we can conclude that the expected monetary value i.e. 38, and the decision would be
Reliance Industries Ltd.

Ans 2.

Introduction:

Correlation coefficients are being used to assess the strength of an association between two
variables. The correlation coefficient is a statistical term that aids in the establishment of a
relationship among predicted and actual values acquired in a statistical sum. The estimated
correlation coefficient shows the closeness of the expected and actual values.
A correlation value of 1 indicates that for every positive rise in one variable, there is a fixed
corresponding increment in the other. A correlation coefficient of -1 shows that for every
positive rise in one variable, there is a fixed proportional reduction in the other. For example,
the amount of gas in a tank reduces in (nearly) perfect proportion to speed. Zero indicates that
there is no positive or negative rise for every increase. They are not connected.
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A scatter diagram depicts the association amongst two variables. A scatter diagram is among
the most effective tools for displaying a non-linear pattern. A scatter diagram gives evidence
to support a claim that two variables are connected. It is basically a two-dimensional
rectangular coordinate graph with points representing the values of the two variables being
studied.

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q=tbn:ANd9GcRS3A61Ddjl2ruPvTWBIQtg6G52ytCl9pWxxg&usqp=CAU

Concept and Application:

Correlation coefficients quantify the degree of similarity amongst two variables. A variable
correlation shows that when one variable's value changes, the other variable appears to shift
in a number of directions. Understanding that relationship is beneficial because we may use
one variable's value to anticipate the value of the other variable. Correlation coefficients are a
quantitative measure of the direction and strength of this propensity to change
simultaneously. Correlation is a statistical concept that describes how two variables move in
tandem with each other. It is a numerical statistical metric that reflects the magnitude and
direction of the force amongst two or more variables. When two or more variables move in
the same direction, they are said to be positively correlated. They have a negative correlation
if they travel in opposite directions. The goal of using correlations in research is to determine
which variables are linked.
Pearson's correlation coefficient is calculated by taking the covariance of two variables and
dividing it by the sum of their standard deviations. It is commonly symbolised by (rho). cov
(X,Y) / X = (X,Y).
Scatter Diagrams are useful mathematical tools for investigating the relationship amongst the
two random variables. They take the form of a sheet of paper with data points pertaining to
the variables of interest spread over it. Scatterplots are an excellent technique to immediately
test for correlation between two sets of continuous variables.
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1. Using Excel, we can determine the correlation coefficient and obtain the following
data:

Number of Number of
Migrant factory/Work commercial
person shop/Worksh establishment Number of
Districts numbers ed etc. s towns
Kupwara 2667 188 6571 10
Badgan 5370 273 5552 9
Leh(ladakh) 2621 176 3898 3
Kargil 650 61 1711 1
Punch 2038 67 3605 3
Rajouri 4011 236 4656 4
Kathua 11306 504 6952 6
Baramula 19382 663 12171 7
Bandipore 4866 156 3258 3
Srinagar 94844 3575 47986 5
Ganderbal 3041 231 2418 3
Pulwama 7939 257 4885 5
Shupiyan 1700 30 1673 1
Anantnag 13545 919 14079 12
Kulgam 2621 243 3902 7
Doda 2297 76 3016 2
Ramban 1171 41 1768 3
Kishtwar 569 45 1765 1
Udhampur 10873 549 6795 6
Reasi 2085 28 3677 5
Jammu 139422 2410 46539 20
Samba 5349 685 5162 6
Migrant
person
numbers V/s
‘Number of
Factory/Work
shop/Work
shed etc.’ 0.8973328316
Migrant
person
number V/s
‘Number of
commercial
establishments
’ 0.9665746707
Migrant
person
number V/s
‘Number of
towns’ 0.6629394793
Migrant
person
number V/s
‘Population -
per sq. km.’ 0.0179593907

Interpretation:

Migrant person numbers V/s ‘Number of Factory/Workshop/Work shed etc.= 0.8973328316,

It denotes a perfect positive correlation coefficient between the two variables.

Migrant person number V/s ‘Number of commercial establishments’= 0.9665746707, It

denotes a perfect positive correlation coefficient between the two variables.

Migrant person number V/s ‘Number of towns’= 0.6629394793, It denotes a perfect

positive correlation coefficient between the two variables.

Migrant person number V/s ‘Population per sq. km.’=-0.0179593907, It denotes a negative
correlation coefficient which indicates an inverse relationship between both the two variables.

2. Using excel to plot the scattered diagram of all the 4 correlation coefficients, we get
the following graph:

a. Scattered diagram for Migrant person numbers V/s ‘Number of

Factory/Workshop/Work shed etc.

b. Scattered diagram for Migrant person number V/s ‘Number of commercial

establishments’
c. Scattered diagram for Migrant person number V/s ‘Number of towns’

d. Scattered diagram for Migrant person number V/s ‘Population per sq. km.’
Conclusion:

Hence, we can conclude that a scatterplot displays the strength, direction, and form of the
relationship between two quantitative variables. A correlation coefficient measures the
strength of that relationship. The correlation coefficient and scattered diagram of all the four
variables are given above with their interpretation.

Ans. 3(a)

Introduction:

Probability is synonymous with possibility. It also refers to a mathematical branch that deals
with the occurrence of a random event. The value ranges from zero to one. It basically
indicates the likelihood of anything happening. It expresses the possibility of an event
occurring. The probability of all events in a sample space equals to the value one. A
probability technique can be used to calculate the likelihood of an occurrence by simply
dividing the favourable number of possibilities by the entire number of possible outcomes.
Since there can never be more good outcomes than there are possible outcomes, the chance of
an event occurring can range from 0 to 1. Furthermore, the positive number of outcomes
cannot be negative.
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The formula for probability:

Probability of event to happen P(E) = Number of favourable outcomes/Total Number of

outcomes.

Concept and Analysis:

The number of favourable outcomes to all possible outcomes of an event is the proportion,
which is known as probability. It measures how probable something is to occur. Probability is
a field of mathematics that focuses with estimating the likelihood of occurrence of a
particular event. The Z-score measures how far a given value deviates from the standard
deviation. The Z-score, also known as the standard score, is the number of standard
deviations above or below the mean for a given data set. The standard deviation reflects the
degree of variance within a particular data collection.

Given:
mean=600
Standard deviation = 200
Supermarket is open 16hours per day

Formula:

X̄ = ( Σ xi ) / n

X̄ = 10000/16 = 625

Formula:

z = (x̄ – μ) / σ
where x represents the raw score, μ is the mean of population , and σ represents the
population standard deviation.

z = (625 - 600)/200 = 0.125

P(X̄ > 625) = P(z > 0.125) = 0.4503

Conclusion:

We can conclude that the probability that the total number of customers who enter the
supermarket ‘German’ supermarket-Gandhinagar in one day is greater than 10,000 is 0.4503.

Ans. 3b.

Introduction:

The term "probability" refers to the likelihood of a specific event (or group of events)
occurring, represented on a linear scale from 0 (impossibility) to 1 (certainty), as well as as a
percentage between 0 and 100 percent. Statistics is the study of occurrences guided by
probability. The more common understanding of probability is that it is merely a measure of
the occurrence of outcomes, but Bayesians considers probability more highly subjective as a
statistical technique that attempts to estimate parameters of a statistical properties derived
from empirical distributions. When measured in standard deviation units, a z-score represents
the location of a raw score in respect of its proximity from the mean. The z-score can be
concluded as positive if the value is more than the mean and negative if the value is less than
the mean. It is also known as a standard score since normalising the distribution enables for
comparison of results on other types of factors.

Source: https://i2.wp.com/www.learncbse.in/wp-content/uploads/2019/04/Probability-
Formulas.png?fit=560%2C315&ssl=1

Concept and Analysis:

The likelihood of an occurrence is the proportion or ratio of the number of cases favourable
to it to the total number of cases feasible while nothing tells us to believe any of these
circumstances to happen more than any other, making them simultaneously feasible for us.
The Z test is a statistical test performed on data that roughly matches a normal distribution.
For hypothesis testing, the z test can be applied to one sample, two samples, or proportions.
Whenever the population variance is known, it determines whether or not the means of two
big samples vary. A z testing is used to assess if the means of two populations vary or not,
assuming the data follows a normal distribution.
Based on the data given above, we have:

Sample size = 600 customers, n= 600

Probability of success= probability of satisfied customers = 50%,
So P= 0.5
Probability of failure= 1-P= Q= 0.5

Mean(X̄) = number of success needed = less than 45% of 600

= 45/100 ×600=270

= P(X<270)
= P(p<270/600)
=P(p<0.45)

Converting to standard normal variable, we get here is :

z = (x-μ)/σ

where x represents the raw score, μ is the mean of population , and σ represents the
population standard deviation.

P(Z< 0.45−0.5
—------------
√ 0.5 ×0.5 /600

P(Z< -2.45)

Getting the data from the standard normal tables, we get is 0.0072

Conclusion:

From this, we can conclude that the probability that in a random sample of 600 customers is
less than 45% are satisfied with services and prices is 0.0072. Also, as 0.0072<0.5 , hence we
can say that the probability of that event happening is unusual and rare.