Decision Analysis Notes
Decision Analysis Notes
Decision Analysis Notes
0 DECISION ANALYSIS
8.1 Introduction
Decision analysis concerns with evaluating and choosing one or more best alternatives among
several existing alternatives. This analysis considers all the possible alternatives and possible
outcomes.
We first define the following concepts
Decision alternatives: these are possible strategy or strategies that a decision maker
decide to take after the analysis.
States of nature: the uncontrollable future events that can affect the outcome of a
decision.
Payoff: the outcome measure such as profit, cost, etc. Each combination of a decision
alternative and a state of nature has an associated payoff.
Payoff table: A tabular representation of the payoffs for a decision in a decision problem.
1
Outcomes (Demand)
No plant 0 0 0
1. Maximax Criterion
• It is also known as optimistic approach
• Assume the best payoff will occur for each alternative
The Thompson’s lumber analysis using maximax criterion is shown below
2
Outcomes (Demand)
No plant 0 0 0 0
Outcomes (Demand)
No plant 0 0 0 0
3
Outcomes (Demand)
No plant 0 0 0 0
Outcomes (Demand)
4
EMV (for alternative i) = ∑(probability of outcome) x (payoff of an outcome)
An alternative with the highest EMV is chosen.
Outcomes (Demand)
No plant 0 0 0 0
Outcomes (Demand)
5
Large plant 0 0 120,000 24,000
Outcomes (Demand)
6
Small plant 90,000 50,000 -20,000
No plant 0 0 0
7
Consider the Thompson Lumber problem for illustration