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Decision Theory Introduction What makes the difference between good and bad decisions? Good decisions may be defined as: Based on logic, Considered all possible decision alternatives, Examined all available information about future, and Applied decision modeling approach.

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Choice Theory

Introduction What has the effect in the middle of good and awful choices? Great choices may be characterized as: Based on rationale, Considered all conceivable choice choices, Examined all accessible data about future, and Applied choice displaying methodology. Awful choice s may be characterized as: Not in view of rationale, Did not utilize all accessible data, Did not consider all choices, and Did not utilize suitable choice displaying strategies.

Decision Analysis An arrangement of quantitative choice settling on systems for choice circumstances where vulnerability exists

Decision Theory Elements An arrangement of conceivable future conditions exists that will have a heading on the choice's consequences A rundown of options (game-plans) for the chief to browse A known result for every option under every conceivable future condition

Decision Making States of nature Events that may happen later on Decision creator is indeterminate which condition of nature will happen Decision producer has no power over the conditions of nature

area arranging c apacity arranging gear choice Decision Theory Decision Theory speaks to a general way to deal with choice making which is suitable for an extensive variety of operations administration choices, including: item and administration outline

Five Steps of Decision Making 1. Unmistakably characterize the current issue. 2. Rundown all conceivable choice choices. 3. Distinguish conceivable future occasions (conditions of nature) 4. Distinguish result (more often than not, benefit or expense) for every blend of choices and occasion s. 5. Select one of the choice hypothesis displaying systems, apply choice model, and settle on choice.

Thompson Lumber C ompany (1 of 2) Step 1. Recognizes issue as: whether to grow product manufacturing so as to offer and showcasing new item which is âbackyard stockpiling sheds.â Step 2. Create choice options accessible. D ecision option is characterized as game-plan or procedure that may be picked by the leader. Options are to develop: (1) an expansive plant to produce stockpiling sheds, (2) a little plant to make stockpiling sheds, or (3) manufacture no plant by any stretch of the imagination. Step 3. Distinguish conceivable future occasion s

Thompson Lumber Company (2 of 2) Step 4. Express result coming about because of every conceivable mix of options and occasion s. Target is to augment benefits. Step 5. Select choice hypothesis show and apply it to information to help settle on choice. Kind of choice model accessible relies on upon the working environment and the measure of vulnerability and danger included.

Payoff Table A technique for sorting out & representing the settlements from diverse choices given different conditions of nature A result is the choice's result

Payoff Tables Payoff Tables can be developed when there is a limited set of discrete choice choices. In a Payoff Table - The lines relate to the conceivable choice options. The sections compare to the conceivable future occasions. Occasions (States of Nature) are totally unrelated The table's body contains the settlements.

Payoff Table States o f Nature Decision a b 1 Payoff 1a Payoff 1b 2 Payoff 2a Payoff 2b

Payoff Table: Thompson Lumber Company

Types Of Decision Making Environments Type 1: Decision Making under Certainty Type 2: Decision Making under Uncertainty Type 3: Decision Making under Risk.

Types Of Decision Making Environments Type 1: Decision Making under Certainty . Chief knows with assurance the result of each choice option. (The future condition of nature is thought to be known.) Type 2: Decision Making under Uncertainty . Leader has no data about different results. (There is no learning about the states' likelihood of nature happening)

Types Of Decision Making Environments Type 3: Decision Making under Risk . Chief has some information with respect to the likelihood of event of every occasion or condition of nature. (There is some learning about the states' likelihood of nature happening)

Decision Making Under Uncertainty

Decision Making Under Uncertainty-Steps of : Construct a Payoff Table Select a Decision Making Criterion Apply the Criterion to the Payoff Table Identify the Optimal Solution

Decision Making Under Uncertainty The decison criteria depend on the choice makerâs mentality toward life These incorporate an individual being cynical or hopeful, preservationist or forceful

Decision Making Criteria Under Uncertainty Criteria for settling on choices under instability. Maximax. Maximin Equally likely. Standard of authenticity. Minimax lament. Initial four criteria computed specifically from choice result table. Fifth minimax lament standard obliges utilization of chance misfortune table.

Maximax Criterion (1 of 2) Maximax model chooses the option that expands most extreme result over all options. Depends on the best conceivable situation. To start with find most extreme result for every option. Select option with greatest worth . Choice standard finds elective with most elevated conceivable addition. Called idealistic basis. Table shows maximax decision is first option: "construct vast plant."

Maximax Criterion (2 of 2) Example 1: Thompson Lumber Company Maximax basis chooses elective that expands most extreme result over all choices. To start with option, "construct a substantial plantâ, $200,000 result is most extreme of greatest adjustments for every choice option.

Maximin Criterion (1 of 2) Maximin model finds the option that expands least result over all choices. Depends on the most dire outcome imaginable. To begin with find least result for every choice option over all conditions of nature. Select the option with the greatest worth . Choice measure finds the option that has the slightest conceivable misfortune. Called critical model. Maximin decision, "do nothing," is appeared in table. $0 result is most extreme of least settlements for every option.

Maximin Criterion (2 of 2) Example 1. Thompson Lumber Company First find least result for every option, and select the option with most extreme number.

Equally Likely (Laplace) Criterion (1 of 2) Equally likely , additionally called Laplace , basis discovers choice option with most noteworthy normal result (here the probabilities of every condition of nature is thought to be equivalent) Calculate normal result for each option. Pick the option with most extreme normal result. Accept all probabilities of event for conditions of nature are equivalent. Just as likely decision is the second option, "construct a little plant." Strategy appeared in table has greatest normal result ($40,000) over all choices.

Equally Likely (Laplace) Criterion (2 of 2) Example 1. Thompson Lumber Company Equally likely model discovers choice option with most noteworthy normal result. Ascertain normal result for each option. Pick elective with greatest normal result.

Criterion of Realism (Hurwicz) (1 of 3) Often called weighted normal , the foundation of authenticity (or Hurwicz ) choice basis is a trade off in the middle of hopeful and skeptical choice. Select coefficient of authenticity , a , with worth somewhere around 0 and 1. At the point when an is near 1, chief is hopeful about future. At the point when an is near 0, chief is cynical about future. Â

Criterion of Realism (2 of 3) Formula for rule of authenticity = a (most extreme result for option) + (1-a ) (least result for option) Assume coefficient of authenticity a = 0.80. Best choice would be to develop a huge plant. This a lternative has most astounding weighted normal result: $124,000

Criterion of Realism (3 of 3) Example 1. Thompson Lumber Company Coefficient of authenticity a = 0.80. $124,000 = (0.80)($200,000) + (0.20)(- $180,000).

Minimax Regret Criterion (1 of 5) Final choice standard depends on circumstance misfortune. Create opportunity misfortune (misgiving) table. Focus opportunity loss of not picking the best option for every condition of nature (or the failing so as to misgive to pick the âbestâ choice)

Minimax Regret Criterion (2 of 5) Opportunity misfortune , additionally called misgiving for any condition of nature, or any segment is ascertained by subtracting every result in section from best result in the same segment. The option with the most extreme's base second thoughts for every option is chosen.

Minimax Regret Criterion (3 of 5) Example 1. Thompson Lumber Company Best result for good market is $200,000 as aftereffect of first option, "construct a huge plant." Subtract all adjustments in section from $200,000. Best result for unfavorable business sector is $0 that is the consequence of third option, "do nothing." Subtract all settlements in segment from $0. Table delineates calculations and shows complete open door misfortune table.

Minimax Regret Criterion (4 of 5) Example 1. Thompson Lumber Company Table represents calculations and shows complete open door misfortune table.

Minimax Regret Criterion (5 of 5) Example 1. Thompson Lumber Company Once the open door misfortune table has been developed, find the most extreme open door misfortune inside of every option. Pick the option with least esteem Minimax lament decision