Structuring Decisions. Dr. Yan Liu Department of Biomedical, Industrial & Human Factors Engineering Wright State University. Introduction. Step 1: Identifying and Structuring the Values and Objectives Identifying issues that matter
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Dr. Yan Liu
Department of Biomedical, Industrial & Human Factors Engineering
Wright State University
A Fundamental Hierarchy of Vehicle Regulation
A Means Objective Network of Vehicle Regulation
Techniques for Organizing Objectives
The Peach Tree Consumer Products Inc. has an opening for a summer intern. Working under the supervision of a senior employee in the marketing group, the intern would focus primarily on the development of a market survey for certain of the company’s products. The problem is how to find an appropriate individual to fill this slot.
List of Objectives
Return on Investment
Computer Industry Growth
Payoff NodeInfluence Diagrams
Influence Diagram of a Venture Capitalist’s Decision Problem
Relationships between nodes are symbolized with arrows or directed arcs
Distinctions are made here between sequence and dependence arcs only for teaching purposes. Once you are familiar with the differences, you can use solid arcs throughout the influence diagram like the convention used in the textbook
You have $2,000 to invest and the objective is to earn as high a return on your investment as possible. There are two alternatives: investing in a friend’s business or keeping the money in a savings account with a fixed interests rate. If you invest in the business, your return depends on the success of the business. You figure there could be two possible outcomes: the business is either widely successful earning you $3,000 beyond your initial investment (hence leaving you $5,000 in total) or a total flop, in which case you will lose all your money. On the other hand, if you put your money into a saving account, you will earn $200 in interest regardless of your friend’s business.
Suppose you live in Miami. A hurricane near the Bahama Islands threatens to cause severe damage. As a result, the authorities recommend everyone to evacuate. Although the evacuation is costly, you would be safe. On the other hand, staying is risky. You could be injured or even killed if the storm comes ashore within 10 miles of your home. If the hurricane’s path changes, however, you would be safe without having incurred the cost of evacuating. The two fundamental objectives are to maximize your safety and to minimize your costs.
Undoubtedly, you will pay close attention to the weather forecasters who would predict the course of the storm. However, the weather forecasters are not perfect predictors because not everything is known about hurricanes.
Influence Diagram of the Evacuation Decision Problem
Suppose in the example of hurricane-evacuation decision, you are waiting anxiously for the forecast as the hurricane is bearing down. Should you keep waiting for the forecast or leave immediately? In this case, you are facing a sequential decision situation. If you decide to wait for the forecast, then your next decision is whether you should evacuate or stay based on the forecast information.
Influence Diagram of the Sequential Evacuation Decision Problem
ProfitBasic Influence Diagrams (Cont.)
Suppose a firm is considering introducing a product, and its fundamental objective is to maximize the profit.
Unit Variable Cost
CostBasic Influence Diagrams
The Environmental Protection Agency (EPA) often must decide whether to permit the useof an economically beneficial chemical that may induce cancer (carcinogenic). Furthermore, the decision often must be made without perfect informationabout either the long-term benefitsor health hazards. Alternative courses of actions are to permit the use of the chemical, restrict its use, or to ban it all together. Tests can be runto learn something about the carcinogenic potential, and survey datacan give an indication of the extent to which people are exposed when they do use the chemical. These pieces of information are both important in making the decision. For example, if the chemical is only mildly toxic and the exposure rate is minimal, then restricted use may be reasonable. On the other hand, if the chemical is only mildly toxic but the exposure rate is high, then banning its use may be imperative.
Influence Diagram of the EPA Decision Problem
Influence Diagram of the EPA Decision Problem
(adding a computation node)
Outcome of Uncertain Event
Decision Tree of the Investment Decision Problem
The fundamental objective of a politician is to have a career that provides leadership for the country and representation for her constituency. She can do so to a varying degrees by serving in Congress. She might have two options: 1) running for reelection to her U.S. House of Representatives seat, in which case her reelection is virtually assured; and 2) running for a Senate seat, in which case there is a chance of losing. If she loses, she could return to her old job as a lawyer (the worst possible outcome). The best possible outcome is to win the Senate place in terms of her objective of providing leadership and representation.
Decision Tree of the Politician’s Basic Risk Decision
The Politician’s Double- Risk Decision Dilemma
An individual has sued for damages of $450,000 because of injury. The insurance company has offered to settle for $100,000. The plaintiff must decide whether to accept the settlement or go to court.
Decision Tree of the Insurance Example
Decision Tree of the Evacuation Decision Problem
Decision Tree of the Sequential Evacuation Decision Problem
A company needs to decide whether to spend $2M to continue with a particular research project. The success of the project (measured by obtaining a patent) is not assured. At this point, the decision maker judges only a 70% chance of getting the patent. If the patent is awarded, the company can either license the patent for an estimated $25M or invest an additional $10M to create a production and marketing system to sell the product directly. If the company chooses the latter, it faces uncertainty of demand and associated profit from sales.
Develop Production and Marketing to Sell Product
A Decision Tree Representation (With Cash Flows and Probabilities Specified) of the Research-and-Development Decision Problem