Operations Research Decision Making Under Uncertainty

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Purdue University Leyla Ozsen

IE 383 Fall 2005

DECISION ANALYSIS Making important decisions often requires treating major uncertainty, long time horizons, and complex value issues. To deal with such problems, the discipline of decision analysis was developed. The discipline comprises the philosophy, theory, methodology, and professional practice necessary to formalize the analysis of important decisions. Decision Analysis is a set of quantitative decision-making techniques for decision situations in which uncertainty exists. Decision analysis represents not only a collection of decisionmaking techniques but also an analysis of logic underlying decision making. Decision-making requires choosing between alternatives. While the range of alternatives to be considered is set by the decision-maker, the decision analyst may be able to suggest new alternatives as the analysis progresses. Many decision problems become relatively trivial if uncertainty is removed. For example, consider how easily a decision-maker could make a critical decision in launching a new commercial product if he/she could predict with certainty production and sales costs, pricedemand relationships, and governmental decisions. Decision analysis treats uncertainty effectively by encoding informed judgment in the form of probability assignments to events and variables. One of the most basic concepts in decision analysis is the distinction between a good decision and a good outcome. A good decision is a logical decision -- one based on the information, values, and preferences of the decision-maker. A good outcome is one that is profitable, or otherwise highly values. In short, a good outcome is one that we wish would happen. By making good decisions in all situations that face us, we hope to ensure as high a percentage of good outcomes as possible. We may be disappointed to find that a good decision has produced a bad outcome, or dismayed to learn that someone who has made what we consider to be a

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