decision making tools 1. elements of decision problems 2
DESCRIPTION
3 1.Objectives 2.Decisions 3.Uncertain Events 4.ConsequencesTRANSCRIPT
DECISION MAKING TOOLS
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Elements of Decision Problems2
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Elements of Decision Problems1. Objectives
2. Decisions
3. Uncertain Events
4. Consequences
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1. Objectives
Objective:
A specific thing one wants to achieve:
To harvest successfully – Farmer.
To resolve a specific scientific problem – Scientist.
To make a lot of money – Investor.
Super ComputerObjectives
Price•Five-Year Costs•Cost of Improved performance
Performance•Speed•Throughput•Memory Size•Disk Size•On-Site performance
User Needs•Installation Date•Rollin/Roll out•Ease of Use•Software Compatibility•Mean Time to Failure
Operational Needs•Square Footage•Water Cooling•Operator Tools•Telecommunications•Vendor Support
Management Issues•Vendor Health•US Ownership•Commitment to super computer
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Decision Context
DECISION CONTEXT =
The setting in which a decision occurs
Decision Context activates only subset of objectives.
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2. Decisions (to be made)
•At least two alternatives required
•Most decisions call for: The Immediate Decision
•Look at all possible decision alternatives: Be Creative!
•Decision may be of a sequential nature:
Future decisions may need to be taken into account when making immediate decision
List of possible decisions is important, but more important is the order in which they occur.
ImmediateDecision
SecondDecision
ThirdDecision
Final Decision
NowTime Line
Resultsare
known
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3. Uncertain EventsMany decisions (All?) are made
under the presence of uncertainty
Investment decision: Will stock of company go up or not?
Camping decision: Will the weather be good or not?
Mutual fund decision: Will entire stock market go up?
A decisions problem becomes more complicated when the number of
relevant uncertain events increases
The time sequence of uncertain events related to the sequence of decision is important.
Why?
• Tells you what information becomes known before a decision has to be made
• Uncertain events may be unknown at the time of the immediate decision, but may be known by subsequent decisions
ImmediateDecision
SecondDecision
ThirdDecision
Final Decision
NowTime Line
Resultsare
known
Resolved beforesecond decision
Resolved beforethird decision
Resolved beforefinal decision
Resolved beforelast decision
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4. Consequences
Evaluation of outcomes:• Profit – Measured in # Dollars• Casualties – Measured in # Deaths• Environmental Damage – Measured in # Polluted Soil• Health Risk – Measured in # Infected People
Trade off between has to be madein almost any decision problem
ImmediateDecision
SecondDecision
ThirdDecision
Final Decision
NowTime Line
PlanningHorizon
Resolved beforesecond decision
Resolved beforethird decision
Resolved beforefinal decision
Resolved beforelast decision
Conse-quences
Planning Horizon = Time when decision maker finds out the results
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Larkin Oil
15m
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• What is the immediate decisions?
• Is this a sequential decision problem?
• What is an appropriate planning horizon for
Larkin?
• A graphical representation?
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Structuring Decisions16
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Steps
Suppose elements of Decision Problem (DP) are available, i.e.:
• Objectives that apply to the decision context
• Immediate Decision and subsequent decision(s)
• Alternatives for each decision
• Uncertain elements (events)
• Consequences
How does one proceed with structuring the DP?
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STEP 1: Filter & Operationalize the Objectives
STEP 2: Structure the elements in a logical
framework
STEP 3: Fill in the Details
STEP 1: Filter & Operationalize the Objectives
Getting the Decision Context right Enlarging Decision Context may increase the
number of objectives that are relevant. Decreasing the Decision Context may cause
current relevant objectives to become irrelevant.
Classify how to measure objectives
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STEP 2: Structure the elements in a logical framework
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• Structure Logic and time sequence between decisions
• Structure Logic (dependence) between the uncertain events
• Structure time sequence of uncertain events related to the sequence of decisions
• Represent Logic by using Influence Diagrams or Decision Trees
STEP 3: Fill in the Details21
e.g.;
• Give precise definitions of decisions & uncertain events
• Specify probability distributions for the uncertain events
through a combination of data analysis & expert judgment.
• Specify precisely how consequences are measured and
formalize trade off between objectives
Influence Diagrams22
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About
An influence diagram (or decision diagram) is a graphical model used to represent the structure of a decision problem and the relationships among its different elements (uncertainties, decisions, and consequences).
The diagram is built based on the decision maker’s current state of knowledge about the situation.
different elements (uncertainties, decisions, and consequences).
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• An influence diagram captures current state of
knowledge
• An influence diagram should NEVER contain cycles
• Interpreting an influence diagram is generally easy
• Creating influence diagrams is difficult
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Basic ElementsA node is the basic element in an influence diagram. Each node corresponds to a specific distinction or variable, including uncertainties, decisions, and consequences.
Decision Chance/ Uncertainty
Deterministic Consequence/
Value/ Objective
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An arc is a line with an arrowhead pointing from one node to another node in an influence diagram.We refer to the sending node as a parent and the receiving node as a child.If the child node is a decision node, then the arc is informational, and indicates that the parent node’s value will be known to the decision maker at the time the decision will be chosen. Otherwise, the arc is conditional, and indicates that we will be assessing a (probability) distribution for the child conditioned on its parents.
Logical relationships
Indicates Sequence; points only to Decision Nodes
Indicates Dependence; points only to Chance Nodes& Consequence Nodes
A B
Decision A is madebefore Decision B
D
Outcome of C is knownbefore Decision D is made
C
FE
Decision E is relevantto assessing probabilitiesof outcomes of F
G H
Outcome of E is relevantto assessing probabilitiesof outcomes of F
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Basic Influence DiagramsBasic Risk Decision
InvestmentChoice
BusinessResult
Return on Investment
AlternativesSavingsBusiness
OutcomesWild SuccessFlop
Choice Business Result ReturnSavings Wild Success 2200
Flop 2200Business Wild Success 5000
Flop 0
InvestmentChoice
BusinessResult
Return on Investment
AlternativesSavingsBusiness
OutcomesWild SuccessFlop
Choice Business Result ReturnSavings Wild Success 2200
Flop 2200Business Wild Success 5000
Flop 0
Imperfect Information
Decision
HurricanePath
Consequence
Forecast
AlternativesEvacuateStay
OutcomesHits MiamiMisses Miami
ConsequenceChoice Outcome Risk CostEvacuate Hits Miami Low Risk High Cost
Misses Miami Low Risk High CostStay Hits Miami High Risk High Cost
Misses Miami Low Risk Low Cost
Forecast"Hits Miami""Misses Miami"
Decision
HurricanePath
Consequence
Forecast
AlternativesEvacuateStay
OutcomesHits MiamiMisses Miami
ConsequenceChoice Outcome Risk CostEvacuate Hits Miami Low Risk High Cost
Misses Miami Low Risk High CostStay Hits Miami High Risk High Cost
Misses Miami Low Risk Low Cost
Forecast"Hits Miami""Misses Miami"
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Sequential Decisions
Evacuate?
HurricanePath
Consequence
Forecast
Wait for Forecast?
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Intermediate Calculations (deterministic nodes)
Introduce Product?
Revenue
Profit
Cost
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Introduce Product?
Units Sold
Profit
Fixed CostPrice?
VariableCost
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Introduce Product?
Units Sold
Profit
Fixed CostPrice?
VariableCost
Revenue Cost
A Lease/Buy Problem The Amiable Insurance Company needs
additional copying capacity. They are currently negotiating with
Sharp Image (SI), manufacturer of the X100 copier.
Lease or buy the X100 from SI?
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Facts: effective life of three years (length of planning
horizon). SI will sell an X100 copier to Amiable for $10,000. SI will lease Amiable an X100 copier for a yearly
fee of $1,500 plus a usage fee of 7¢per copy. maintenance fees (if purchased): $800 annually. X100 will have a salvage value of $1,000 at the
end of three years. expect to make 50,000 copies on the X100 per
year. interest rate for discounting purposes is 20%.
Amiable’s objective: minimize the total discounted costs associated with the X100 copier that are generated over the three year planning horizon.
Should they lease or buy the X100?
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Enriching Determination of Salvage Value Salvage value now depends upon:
the purchase price (P); the length of the planning horizon (N);
and, the usage per year (U).
Specified askP/(N × U),where k is a given constant.
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Example: Toxic Chemicals and the EPA
15m
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