Presentation of

Business Analytics And Modelling

Topic - Decision Analysis And Decision Tree,

Multiple Regression Analysis
And Time Series Analysis

By –
TANISHK SINGH
 Decision Analysis
Decision Analysis is a systematic and quantitative approach to decision-making that involves assessing
and analyzing various alternatives to make informed choices. It is particularly useful in complex and
uncertain situations where multiple factors need to be considered.

Key Components

 Decision Problem Formulation:

• Objectives: Clearly define the objectives that the decision aims to achieve. These objectives provide a basis for
evaluating and comparing alternatives.

• Constraints: Identify any constraints or limitations that must be considered in the decision-making process.

 Identification of Alternatives: Generate a comprehensive list of possible alternatives or courses of action that could address
the decision problem.

 Uncertainty and Risk Assessment:

• Identify and assess uncertainties and risks associated with each alternative.
• Consider factors that are beyond the decision-maker's control and may impact the outcomes.
 Criteria and Decision Variables:
• Define the criteria and decision variables that will be used to evaluate and compare the alternatives.
• Quantify these criteria whenever possible to facilitate objective analysis.

 Probability Assessment:
• Assign probabilities to the uncertainties identified during the analysis. This involves estimating the likelihood of various
scenarios or outcomes.

 Decision Models:
• Develop mathematical models, simulations, or other analytical tools to represent the relationships between decision
variables, uncertainties, and outcomes.

 Preference Elicitation:
• Capture the preferences and priorities of decision-makers regarding the criteria and objectives.
• Use techniques such as utility functions to quantify preferences and trade-offs.

 Analysis and Evaluation:

• Apply decision models to analyze and evaluate the impact of different alternatives on the defined criteria.

 Sensitivity Analysis:
• Assess the sensitivity of the decision to changes in assumptions, input parameters, or uncertainties.
• Understand how variations in key factors affect the overall decision.

 Decision Strategy:
• Develop decision strategies based on the analysis and preferences of decision-makers.
• Determine the optimal or preferred alternative considering the objectives and constraints.
 Decision Tree
A Decision Tree is a graphical representation of a decision-making process that shows the possible
outcomes of different choices. It is a powerful tool in decision analysis and can be used for both
quantitative and qualitative decision-making. Decision trees are particularly useful when there are
multiple alternatives, uncertainties, and trade-offs involved in a decision.

Key Components

 Decision Nodes:
• Represent decision points in the decision tree where a decision-maker must choose between alternative courses of
action. These nodes are typically depicted as squares or rectangles.

 Chance Nodes (Probability Nodes):

• Represent points in the decision process where uncertainty exists. Associated with probabilities, chance nodes signify
different possible outcomes. They are often depicted as circles.

 Branches:
• Connect decision nodes, chance nodes, and terminal nodes with branches. Each branch represents a possible
alternative or outcome associated with a decision or chance node.

 Outcome or Terminal Nodes:

• Represent the final results or outcomes associated with a particular set of decisions and chance events. Terminal
nodes are usually depicted as triangles.
 Decision Alternatives:
• List the available decision alternatives at decision nodes. Each alternative leads to different branches and subsequent
nodes.

 Probabilities:
• Assign probabilities to the branches emanating from chance nodes. These probabilities indicate the likelihood of each
possible outcome occurring.

 Payoffs (Utilities):
• Assign payoffs or utilities to the outcome nodes. Payoffs represent the benefits or values associated with each possible
outcome.

 Decision Rules:
• Define decision rules that guide the decision-maker at decision nodes. These rules are based on the preferences, priorities,
or criteria established for the decision.

 Tree Structure:
• Organize the decision tree in a hierarchical structure with decision nodes at the top, chance nodes in the middle, and
terminal nodes at the bottom. The structure visually represents the decision-making process.

 Analysis and Evaluation:

• Use the decision tree to analyze the expected values or utilities associated with different decision alternatives. This
involves calculating the expected value of each alternative by considering probabilities and payoffs.

 Decision Strategy:
• Determine the optimal decision strategy based on the analysis. This could involve selecting the alternative with the highest
expected value or using other decision criteria.
 Multiple Regression Analysis
Multiple Regression Analysis is a statistical technique used to examine the relationship between a dependent
variable and two or more independent variables. It extends the principles of simple linear regression, where
there is only one independent variable. Multiple Regression Analysis allows for a more comprehensive
understanding of how several factors may jointly influence the variation in the dependent variable.

Key Components

 Intercept:
• The intercept represents the estimated value of the dependent variable when all independent variables are zero.

 Coefficients:
• These coefficients represent the estimated change in the dependent variable for a one-unit change in the corresponding
independent variable, holding other variables constant.

 Residuals (ε):
• Residuals are the differences between the observed values of the dependent variable and the values predicted by the
regression model. Residual analysis is important for assessing the model's goodness of fit.

 Hypothesis Testing:
• Hypothesis tests are conducted to assess the significance of each coefficient. The null hypothesis typically states that the
coefficient is equal to zero.
 Multicollinearity:
• Multicollinearity occurs when independent variables in the model are highly correlated. It can affect the stability and
interpretation of the coefficients.

 Variance Inflation Factor (VIF):

• VIF is a measure that quantifies the severity of multicollinearity. High VIF values may indicate a problematic level of
multicollinearity.

 Adjusted R-squared:
• Adjusted R(2) accounts for the number of predictors in the model and provides a more accurate measure of goodness of fit
when comparing models with different numbers of variables.

 F-statistic:
• The F-statistic tests the overall significance of the regression model. It evaluates whether at least one independent
variable significantly contributes to explaining the variation in the dependent variable.

 Standard Error of the Estimate:

• It represents the average amount by which the observed values deviate from the predicted values. A lower standard error
indicates a better fit.

 Durbin-Watson Statistic:
• It assesses the presence of autocorrelation in the residuals. A value around 2 suggests no autocorrelation.
 Time Series Analysis
Time Series Analysis is a statistical technique used to analyze and interpret temporal data. Time series data consists of
observations on a variable or several variables over time. This analysis allows for the identification of patterns, trends,
and seasonality within the data.

Key Components

 Time Series Data:

• A collection of observations, measurements, or values recorded at different points in time.

 Temporal Patterns:
• Identify and analyze patterns in the data, including trends, seasonality, and cyclic behavior.

 Components of Time Series:

• Trend: The long-term movement or direction in the data, indicating overall upward or downward patterns.
• Seasonality: Repeating patterns that occur at regular intervals, often within a year.
• Cyclic Behavior: Longer-term patterns that are not strictly seasonal, indicating periodic but not necessarily regular
fluctuations.
• Irregular or Random Fluctuations: Unpredictable variations in the data not explained by trend, seasonality, or cyclic
behavior.

 Time Series Decomposition:

• Decompose the time series into its components to analyze and model each part separately, facilitating a better
understanding of the underlying structure.
 Forecasting:
• Generate forecasts for future time points using the fitted model. Understand the uncertainty associated with the forecasts.

 Model Validation:
• Validate the model by comparing predicted values to actual values in a validation dataset not used during model
training.

 Time Series Plotting:

• Create graphical representations of the time series, such as line plots, to visualize trends, seasonality, and other patterns.

 Outlier Detection:
• Identify and handle outliers that can significantly impact the analysis and modeling of the time series.

 Smoothing Techniques:
• Apply moving averages or exponential smoothing to reduce noise in the data and highlight underlying trends or patterns.

 Autocorrelation Function (ACF) and Partial Autocorrelation Function (PACF):

• Examine autocorrelation and partial autocorrelation to identify temporal dependencies and lags in the time series data.

 Stationarity:
• Check for stationarity, ensuring that the statistical properties of the time series (mean, variance, and autocorrelation) do
not change over time. Differencing may be applied to achieve stationarity.

 ARIMA Modeling (Auto-Regressive Integrated Moving Average):

• Select appropriate values of p, d, and q for autoregressive, differencing, and moving average components, respectively, to
model and forecast the time series.
 Conclusion and Integration

 Highlight: The importance of combining these analytical tools for

comprehensive decision-making.
 Synergy: Decision analysis, decision trees, multiple regression, and time
series analysis complement each other to provide a holistic approach.
 Takeaway: Encourage the audience to leverage these techniques based on
the specific needs and complexities of their decision-making scenarios.
THANK YOU!!