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Decision Analysis. How to make a difficult decision?. Uncertainty regarding the future Conflicting values or objectives Goal of Decision Analysis: Help people make good decisions. Good Decisions vs Good Outcomes. Good decisions don’t always result in good outcomes

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Presentation Transcript
how to make a difficult decision
How to make a difficult decision?
  • Uncertainty regarding the future
  • Conflicting values or objectives
  • Goal of Decision Analysis:
    • Help people make good decisions
good decisions vs good outcomes
Good Decisions vs Good Outcomes
  • Good decisions don’t always result in good outcomes
  • Not necessarily the fault of the decision maker
  • A structured approach to decision making should lead to more good outcomes than if decisions were made haphazardly
  • Decisions
  • Alternatives
  • States of nature
  • Decision must involve at least 2 alternatives
    • Alternative: course of action intended to solve a problem
  • Alternatives are evaluated on the basis of the value added to one or more decision criteria
    • Criteria: various factors that are important to the decision maker and influenced by the alternatives
states of nature
States of Nature
  • States of nature correspond to future events that are not under the decision maker’s control
magnolia inns example
Magnolia Inns Example
  • Decision Alternatives
    • Buy at A
    • Buy at B
    • Buy at A & B
    • Buy nothing
  • States of Nature
    • Airport built at A
    • Airport built at B
maximax decision rule
Maximax Decision Rule
  • Alternative with largest payoff
  • Alternative with largest minimum payoff
    • Hedge against worst possible outcome
expected monetary value emv
Expected Monetary Value (EMV)
  • Decision alternative with largest EMV
  • Example: 40% chance A, 60% chance B
expected value of perfect info
Expected Value of Perfect Info
  • EV of PI = EV with PI – max EMV
decision trees
Decision Trees
  • Decision nodes
  • Event nodes
  • Terminal nodes
  • Magnolia Inns Example (page 731)
  • Excel add-in from Prof. Mike Middleton