Chapter 5S - Decision theory. In this chapter include objectives: Describe the different environments under which operations are made, describe and use techniques that apply to decision making under uncertainty, describe and use the expected-value approach, construct a decision tree and use it to analyze a problem, compute the expected value of perfect information, conduct sensitivity analysis on a simple decision problem. | Decision Theory McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. You should be able to: Describe the different environments under which operations are made Describe and use techniques that apply to decision making under uncertainty Describe and use the expected-value approach Construct a decision tree and use it to analyze a problem Compute the expected value of perfect information Conduct sensitivity analysis on a simple decision problem 5S- Student Slides Characteristics of decisions that are suitable for using decision theory A set of possible future conditions that will have a bearing on the results of the decision A list of alternatives from which to choose A known payoff for each alternative under each possible future condition 5S- Student Slides Identify the possible future states of nature Develop a list of possible alternatives Estimate the payoff for each alternative for each possible future state of nature If possible, . | Decision Theory McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. You should be able to: Describe the different environments under which operations are made Describe and use techniques that apply to decision making under uncertainty Describe and use the expected-value approach Construct a decision tree and use it to analyze a problem Compute the expected value of perfect information Conduct sensitivity analysis on a simple decision problem 5S- Student Slides Characteristics of decisions that are suitable for using decision theory A set of possible future conditions that will have a bearing on the results of the decision A list of alternatives from which to choose A known payoff for each alternative under each possible future condition 5S- Student Slides Identify the possible future states of nature Develop a list of possible alternatives Estimate the payoff for each alternative for each possible future state of nature If possible, estimate the likelihood of each possible future state of nature Evaluate alternatives according to some decision criterion and select the best alternative 5S- Student Slides A table showing the expected payoffs for each alternative in every possible state of nature Possible Future Demand Alternatives Low Moderate High Small facility $10 $10 $10 Medium facility 7 12 12 Large Facility (4) 2 16 A decision is being made concerning which size facility should be constructed The present value (in millions) for each alternative under each state of nature is expressed in the body of the above payoff table 5S- Student Slides Decisions are sometimes made under complete uncertainty: No information is available on how likely the various states of nature are. Decision Criteria: 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 Minimax regret Choose the
