Decision Analysis
3 – Decision Analysis
1
Decision analysis is concerned with establishing systematic procedures for making decisions under uncertainty. Knowledge of decision analysis should help analyze a problem in a complicated and uncertain setting, to develop alternatives, and to identify possible outcomes. The decision maker then selects the alternative that best meets his or her objectives and psychological desires. Decision analysis is important because it provides decision makers with a rational way of making a selection. It does not guarantee an optimal decision since the problems are characterized by at least some uncertainty. However, it can indicate which alternative is most suited to the decision maker’s own philosophy, be it optimistic, pessimistic, or somewhere in between.
3 – Decision Analysis 2
1
Applications of decision analysis are widespread such as selection of investment portfolios oil and gas exploration (to drill or not to drill) contracting (to bid or not to bid) agriculture (which crops to plant) manufacturing (which products to produce, how much to produce, which technology to invest) marketing (new products, promotion strategies), & so on.
3 – Decision Analysis
3
A list of alternatives. A list of possible future states of nature. Payoffs associated with each alternative/state of nature combination. An assessment of the degree of certainty of possible future events. A decision criterion.
The list of alternatives must be the set of mutually exclusive and collectively exhaustive decisions that are available to the decision maker. Sometimes, but not always, one of these alternatives will be do nothing.
3 – Decision Analysis 4
2
States of nature refer to a set of possible future conditions, or events, beyond the control of the decision maker that will be the primary determinants of the eventual consequence of the decision. The states of nature, like the list of alternatives, must be mutually exclusive and collectively
1
Decision analysis is concerned with establishing systematic procedures for making decisions under uncertainty. Knowledge of decision analysis should help analyze a problem in a complicated and uncertain setting, to develop alternatives, and to identify possible outcomes. The decision maker then selects the alternative that best meets his or her objectives and psychological desires. Decision analysis is important because it provides decision makers with a rational way of making a selection. It does not guarantee an optimal decision since the problems are characterized by at least some uncertainty. However, it can indicate which alternative is most suited to the decision maker’s own philosophy, be it optimistic, pessimistic, or somewhere in between.
3 – Decision Analysis 2
1
Applications of decision analysis are widespread such as selection of investment portfolios oil and gas exploration (to drill or not to drill) contracting (to bid or not to bid) agriculture (which crops to plant) manufacturing (which products to produce, how much to produce, which technology to invest) marketing (new products, promotion strategies), & so on.
3 – Decision Analysis
3
A list of alternatives. A list of possible future states of nature. Payoffs associated with each alternative/state of nature combination. An assessment of the degree of certainty of possible future events. A decision criterion.
The list of alternatives must be the set of mutually exclusive and collectively exhaustive decisions that are available to the decision maker. Sometimes, but not always, one of these alternatives will be do nothing.
3 – Decision Analysis 4
2
States of nature refer to a set of possible future conditions, or events, beyond the control of the decision maker that will be the primary determinants of the eventual consequence of the decision. The states of nature, like the list of alternatives, must be mutually exclusive and collectively