Presentation on Decision Analysis Prof.

Kazi

Introduction
The Success or failure of any business to the large extent depends upon appropriate decision making. General Definition: Decision analysis is an analytic and systematic approach to studying decision making

A good decision is one that is based on logic, considers all available data and possible alternatives, and applies the qualitative and quantitative approaches to solve them.
Decision Analysis is a method by which non transparent situations can be made transparent so that every one knows what to do relative with their objectives. Decision Analysis provides structure and guidance for thinking systematically about hard decisions.

Environment of decision Making

Deterministic situation or Situation of certainty Stochastic situation or situation of risk Situation of uncertainty Competitive and conflict situation (Games)

1) Decision making under Deterministic situation or Situation of certainty:

Are those in which the outcomes for the alternative courses of action are known with certainty, here it is possible for the decision maker to evaluate the outcomes and choose that course of action which correspond to maximum profit on minimum cost

2) Stochastic (Probabilistic) situation: Are those in which the outcome for the alternative course of action are not known with certainty but the probabilities of the outcome known. 3) Decision Making Under Conflict and Competitive Situation (Game): A Game involving only two players say A & B where gain of one player is the loss of other.

Decision Making Under Uncertainty:

The situation of uncertainty is one where neither the outcome are known with certainty nor the problems of outcome is known Here the decision maker can not use EMV ( Expected Maturity Value ) or EOC ( Expected Opportunity Loss) criterion The following criterion have been recommended and the use of criterion would depends upon decision maker attitude and his psychological state of mind. 1) Maximin Criterion 2) Maximax Criterion 3) Laplace Criterion 4) Minimax Regret Criterion 5) Hurwicz - Criterion

Q.A consumer product company is considering intro of two herbal paste. Toothpaste a high value exotic variety ( X1) and an economy variety (X2).This are in addition to its Regular Variety (X3) in a new package. The marketing department of the company estimates the pay off at high value (S1),Moderate value (S2) & Low level (S3) as given below. Pay off Table ( in lacs of Rs) X1 Statement of nature (Outcome) S1 S2 S3 10 5 1.5 X2 7 4.5 2 X3 3 3 2.5 Probability 1/3 1/3 1/3

Q Should the Company go ahead with marketing either of the new products in place of the old one?
Solution: 1 Maximin Criterion (Find out minimum from the above table)

Action X1 X2

Min Payoff 1.5 2

X3

2.5 (Maximum)

Conclusion: According to Maximin Criterion the Company should go with Regular Product.

2 Maximax Criterion ( It is Optimize)

Action X1 X2 X3 Min Payoff 10 (Maximax) 7 3

Conclusion : According to Maximax Criterion the recommend decision is the Company should consider Exotic Variety ( X1)

3 Laplace Criterion ( Depends on the Outcome) Action Expected Probability Payoff 5.5 4.5 2.83 16.5/3 13.2/3 8.5/3

X1 X2 X3

Conclusion : According to Laplace Criterion the Company should consider Exotic Variety ( X1)

4 Minimax Regret Criterion

Pay off Table (Rs.in lacs)
X1 X2 3 X3 7

Minimax Regret Criterion

Action X1 Min Payoff 1 (Minimax Regret) 3 7

Statement of Nature

S1

X2 X3

(Outcome)

S2
S3

0
1

0.5
0.5

2
0

Conclusion :According to Minimax Regret Criterion the recommend decision is the Company should consider Exotic Variety ( X1)

5 Hurwitz Criterion (Take worst and take better) Where = 0.7 So 70% will be best and remaining 30% will be worst
Action X1 X2 Weighted Payoff
10*0.7+1.5*0.3 = 7.45 7*0.7+2*0.3 = 5.5

X3

3*0.7+2.5*0.3= 2.85

Conclusion :According to Hurwitz Criterion where = 0.7 the recommend decision is the Company should consider Exotic Variety ( X1)

Problem: A businessmen is trying to decide in which of two business venture A or B he should invest. He estimate the probability of success in two ventures to be 0.3 & 0.6 respectively. If venture A succeeds his profit will be Rs-40,000/-,if it fails he will incur loss of Rs-10,000/-.If venture B succeeds his profit will be Rs-20,000/- but if it fails he will incur loss of Rs(12,000/-.) Which venture he should choose? Use EMV Criterion

Solution:
Actions Success Failure Profit Payoff Expected 5,000 Invest in A 40,000 (0.3) Invest in B 20,000 (0.6) -10,000 (0.7) -12,000 (0.4) 7,200

According to EMV criterion, the recommendation decision is invest in B Business. The corresponding EP=Rs.7,200/-

Alternative Solution
Success (0.3)

40,000
7,200 Decision
Invest in A

5000
Failure (0.7) Success (0.6)

7200
Invest in B

-10,000 -10,000

20,000
Failure (0.4)

-12,000

According to EMV criterion, the recommendation decision is invest in B Business. The corresponding EP=Rs.7,200/-

Q: Identify the saddle point in the following payoff matrices and the pure strategies for each player:
Y

X X X X

1 6 -4 5 2

-1 3 3 4 2

-3 -5 2 9 1 2 6 9 10 2

2 1 7 5 2

Solution: I II I 1 -1 II 6 3 III -4 3 IV 5 4 V 2 2
Maximum Payoff 6

III IV V -3 -5 2 2 9 1 1 2 7 6 9 5 10 2 2
9 7

Minimum Payoff -5

1
-4 4 2
Maximin

4 10 Minimax

The payoff matrix has a saddle point (i.e 4) thus the optimal strategies are:

A = (0,0,0,1,0) B = (0,1,0,0,0) Saddle Point V=4

Thank You