QADM - Decision Making

8/8/2019 QADM - Decision Making

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DDECISIONECISION AANALYSNALYSIISSGroup MembersAbdul Mulla

Dipti BharwadaPrachi Jadhav

Vaibhav Patki

Vinit Singh


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A good decision is one that is based on logic, considers all available

data and possible alternatives, and applies the qualitative and

quantitative approaches to solve them

Decision Analysis (DA) provides structure and guidance for thinking

systematically about hard decisions

It allows a decision maker to take action with confidence gainedthrough a clear understanding of the problem

Decision Analysis helps to improve the quality of the resulting

decisions


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The Five commonly used decision criteria are as follows:

Maximin Criterion

Maximax Criterion

Hurwiczs alpha Criterion

Savages minimax regret Criterion

Laplaces Criterion


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Decision making under Certainty or Deterministic situation

Decision making under Risk or Stochastic situation

Decision making under Uncertainty

Conflict and Competitive situation (Games)


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Decision Making under Certainty

In this case the decision maker tends to maximize returns or

minimize costs. The decision taken is such that it satisfies such

criteria in a problem where he knows the outcomes with

certainty.

Decision Making under Uncertainty

In this case the problem is uncertain i.e. , the decision maker

cannot estimate or anticipate the probability of occurrence of the

events with each decision alternatives.


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Decision Making under Risk

In this case the decision maker can anticipate theprobability of occurrence of events that he cannot

control which is called State of Nature associated with

each decision alternative.


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y A decision problem is characterized by decision alternatives, states

of nature, and resulting payoffs.

y The decision alternatives are the different possible strategies the

decision maker can employ.

y The states of nature refer to future events, not under the control of

the decision maker, which may occur. States of nature should bedefined so that they are mutually exclusive and collectively

exhaustive.


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The consequence resulting from a specific combination of a

decision alternative and a state of nature is a payoff.

A table showing payoffs for all combinations of decision alternatives

and states of nature is a payoff table.

Payoffs can be expressed in terms of profit, cost, time, distance orany other appropriate measure.


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In the fall farmer is offered Rs. 50000 for his Apple crop, which will

be harvested in the beginning of the following year. If the farmer

accepts the offer, the money is his regardless of the quality orquantity of the harvest. If the farmer does not accept the offer, he

must sell his oranges in the open market after they are harvested.

Under normal conditions, the farmer can anticipate receiving Rs.

70000 on the open market for his harvest. If he experiences a Frost,

however then much of his harvest will be ruined & he can anticipate

receiving only Rs. 15000 in the open market.


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Determine recommended decisions, using each of the criterion

under the situation of uncertainty. ( for Hurwicz- alpha criterion, use

alpha= 0.4)

Determine recommended decision under the appropriate criterion if

in the past, the farmer has lost much of his harvest to frost 1 out of

every 7 years.


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Action Frost No Frost

Accept 50,000 50,000

Do Not Accept 15,000 70,000


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Action Minimum Payoff

Accept 50,000

Does N

ot Accept

15,000

According to Maximin criterion decision is to Acceptthe offer.

Maximin Value


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Action Maximum Payoff

Accept 50000

Does NotAcc

ept 70000 Maximax Value

According to Maximax Criterion recommended decision isto Not Accept the offer.


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Action Expected Payoff

Accept 50000

Does not Accept 42500

According to Laplace Criterion the recommendeddecision is toAccept the offer.


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Frost No Frost Expected

Payoff

Accept 50000 50000 50000

Does not

Accept

15000 70000 62143

Probability 1/7 6/7

According to EMV criterion the recommended

decision is do not accept the offer.

The corresponding EP is Rs. 62143.


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Action Frost No Frost

Accept 0 20000

Do Not Accept 35000 0

Action MaximumRegret

Accept 20000

Do Not Accept 35000

According to the Savage Criterion

recommended decision is to Accept the offer.

Minimax

Regret


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y Let = 0.4

Action Weighted payoff

Accept 50000*0.4 + 50000*0.6 = 50000

Do notAccept 70000* 0.4 + 15000* 0.6 = 37000

According to Hurwicz- alpha Criterion when is 0.4,the recommendation is toAccept the offer.


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y A Decision Tree is a chronological representation of the decision

problem.

y Each decision tree has two types of nodes; Round nodescorrespond to the states of nature while Square nodes correspond

to the decision alternatives.

y The Branches leaving each round node represent the different

states of nature while the branches leaving each square noderepresent the different decision alternatives.

y At the end of each limb of a tree are the payoffs attained from the

series of branches making up that limb. Squares orRectangles

depict decision nodes.


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QADM - Decision Making