chap 5s decision theory
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BA187TRANSCRIPT
5s-1
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Decision Theory
Chapter 5 Supplement
Decision Theory
5s-2
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Decision Theory
Decision Theory Elements
• A set of possible future conditions exists that will have a bearing on the results of the decision
• A list of alternatives for the manager to choose from
• A known payoff for each alternative under each possible future condition
5s-3
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Decision Theory
Decision Theory Process
• Identify possible future conditions called states of nature
• Develop a list of possible alternatives, one of which may be to do nothing
• Determine the payoff associated with each alternative for every future condition
5s-4
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Decision Theory
Decision Theory Process (Cont’d)
• If possible, determine the likelihood of each possible future condition
• Evaluate alternatives according to some decision criterion and select the best alternative
5s-5
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Decision Theory
Causes of Poor Decisions
Bounded Rationality
The limitations on decision making caused by costs, human abilities, time, technology, and availability of information
5s-6
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Decision Theory
Causes of Poor Decisions (Cont’d)
Suboptimization
The result of different departments each attempting to reach a solution that is optimum for that department
5s-7
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Decision Theory
Decision Environments
• Certainty - Environment in which relevant parameters have known values
• Risk - Environment in which certain future events have probable outcomes
• Uncertainty - Environment in which it is impossible to assess the likelihood of various future events
5s-8
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Decision Theory
Decision Theory
Decision Theory represents a general approach to decision making which is suitable for a wide range of operations management decisions, including:
capacity planning
product andservice design
product andservice design
equipment selection
location planning
5s-9
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Decision Theory
Payoff Table
Alternatives Low Moderate High
Small facility $10 $10 $10
Medium facility 7 12 12
Large facility (4) 2 16
Possible future demand*
*Present value in $ millions
5s-10
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Decision Theory
Decision Making under Uncertainty
Maximin - Choose the alternative with the best of the worst possible payoffs
Maximax - Choose the alternative with the best possible payoff
Laplace - Choose the alternative with the best average payoff of any of the alternatives
Minimax Regret - Choose the alternative that has the least of the worst regrets
5s-11
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Decision Theory
Format of a Decision Tree
State of nature 1
B
Payoff 1
State of nature 2
Payoff 2
Payoff 3
2
Choose A’1
Choose A’2
Payoff 6State of nature 2
2
Payoff 4
Payoff 5
Choose A’3
Choose A’4
State of nature 1
Choose A
’
Choose A’2
1
Decision PointChance Event
5s-12
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Decision Theory
Expected Value of Perfect Information
Expected value of perfect information the difference between the expected payoff under certainty and the expected payoff under risk Expected value of Expected payoff Expected payoffperfect information under certainty under risk
=_
5s-13
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Decision Theory
Sensitivity Analysis
16141210 86420
16141210 86420
A
B
C
A bestC bestB best
#1 Payoff #2 Payoff
Sensitivity analysis: determine the range of probability for which an alternative has the best expected payoff
Example 8
5s-14
McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Decision Theory
Solved Problem 5