Professional Documents
Culture Documents
Decision Theory
Decision Theory
Decision Theory
Presented by: Manish Juno Kuldip Juhi Monika Meera Lokesh Loveleena
INTRODUCTION
As the decisions taken by a manager govern the fortunes of business:
Right decisions will have highly profitable effect while the wrong ones may prove to be disastrous.
DECISION-MAKING ENVIRONMENTS
Decisions are made under four types of environments that differ according to the degree of certainty The degree of certainty may vary from complete certainty to complete uncertainty The region that lies in between corresponds to decision-making under risk
The decision maker simply picks up the best payoff in the table
Though the state of nature is only one, possible alternatives could be numerous
The decision maker enjoys the luxury of having complete information the future
b.
When dealing with the costs, the minimum of each alternative is considered & then the alternative which minimizes the above minimum costs is selected. This is called the Minimin criterion
Alternatives
State of nature high in Rs. moderate in low in Rs. Rs. nil -45000 -80000 -10000
Steps:
a. First find the minimum possible payoff for each alternative & then then chooses the alternative with maximum payoff within this group
b. Thus this criterion identifies the worst outcome of each alternative and then selects the best of those worst
c. When dealing with costs, the maximum cost associated with each alternative is considered and the alternative that minimizes the above maximum costs is selected. This is called minimax criterion d. It is also known as WALD criterion
Alternatives high in Rs. Expand Construct Sub contract 50000 70000 30000
State of nature moderate in Rs. 25000 30000 15000 low in Rs. -25000 -40000 -1000 nil -45000 -80000 -10000
The decision maker might regret after making a particular decision. Therefore, the decision maker should try to minimize his regret before selecting a particular strategy or alternative. Regret (often also called opportunity loss) is defined as the difference between the actual payoff and the payoff that would have been obtained if a different course of action had been chosen.
STEPS:
1. Determine the amount of regret corresponding to each event for every alternative. The regret for jth event corresponding to ith alternative is given by
ith regret = (maximum payoff ith payoff) for the jth event
2. Determine the maximum regret amount for each alternative 3. Choose the alternative which corresponds to the minimum of the above maximum regrets
Alternatives
Expand Construct
20,000 0
<-Minimax
Subcontract 40,000
If = 0, criterion is too pessimistic; when =1, it is too pessimistic. A value between zero and one may be selected depending upon whether the decision maker leans towards pessimism or optimism. In the absence of strong feeling one way or the other, a value of = 0.5 seems to be a reasonable choice.
State of nature high in Rs. moderate low in Rs. in Rs. nil Maximum of Minimum of row row Rs.
Alternatives
Alternatives
Expected payoff
Rs.
Sufficient information to assign probability A number of decision criteria available to the decision maker
PROBLEM
A dairy firm wants to determine the quantity of butter it should produce to meet the demand. Past records have shown the following demand patterns: Butter costs Rs. 40/kg & is sold at Rs. 50/kg
3. Determine EVPI
30
35 40 50
80
40 30 10
SOLUTION
Conditional Profit table
Possible Demand(kg) Probability(1) 15 20 25 30 35 40 50 0.03 0.07 0.1 0.4 0.2 0.15 0.05 150 150 150 150 150 150 150 -50 200 200 200 200 200 200 -250 0 250 250 250 250 250
Possible stock action (kg) 15 in Rs. 20 in Rs.25 in Rs.30 in Rs.35 in Rs.40 in Rs.50 in Rs. -450 -200 50 300 300 300 300 -650 -150 100 350 350 350 350 -850 -600 -350 -100 150 400 400 -1250 -1000 -750 -500 -250 0 500
Possible Demand(kg) Probability(1) 15 20 25 30 35 40 50 EMV 0.03 0.07 0.1 0.4 0.2 0.15 0.05 4.5 10.5 15 60 30 22.5 7.5 150 -1.5 14 20 80 40 30 10 192.5 -7.5 0 25 100 50 37.5 12.5 217.5
Possible stock action (kg) 15 in Rs. 20 in Rs.25 in Rs.30 in Rs.35 in Rs.40 in Rs.50 in Rs. -13.5 -14 5 120 60 45 15 217.5 -19.5 -28 -15 40 70 52.5 17.5 117.5 -25.5 -42 -35 -40 30 60 20 -32.5 -37.5 -70 -75 -200 -50 0 25 -407.5
15 20 25 30 35 40 50
DECISION TREE
A visualization of a complex decisionmaking situation in which the possible decisions and their likely outcomes are organized sequentially in the form of a treelike diagram
DECISION TREE
Assets acquisition
Investment decisions
ADVANTAGES
It structures the decision process and helps decision making in an orderly systematic and sequential manner It requires the decision maker to examine all possible outcomes whether desirable or undesirable It communicates decision making process to others in an easy and clear manner
DISADVANTAGES
Decision tree diagrams become more complicated as the number of decision alternatives increases. It becomes highly complicated when interdependant alternatives and dependent variables are present in the problem It analyses the problem in terms of expected values and thus yields an average valued solution
THANK YOU