Decision Analysis

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# Decision Analysis - PowerPoint PPT Presentation

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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## PowerPoint Slideshow about 'Decision Analysis' - isabella-mitchell

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Presentation Transcript

### 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
• 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
Characteristics
• Decisions
• Alternatives
• States of nature
Decisions
• Decision must involve at least 2 alternatives
• Alternative: course of action intended to solve a problem
Alternatives
• 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 correspond to future events that are not under the decision maker’s control
Magnolia Inns Example
• Decision Alternatives
• Buy at A & B
• States of Nature
• Airport built at A
• Airport built at B
Maximax Decision Rule
• Alternative with largest payoff
Maximin
• Alternative with largest minimum payoff
• Hedge against worst possible outcome
Expected Monetary Value (EMV)
• Decision alternative with largest EMV
• Example: 40% chance A, 60% chance B
Expected Value of Perfect Info
• EV of PI = EV with PI – max EMV
Decision Trees
• Decision nodes
• Event nodes
• Terminal nodes
• Magnolia Inns Example (page 731)
TreePlan
• Excel add-in from Prof. Mike Middleton