RMI 2302 Exam 1 Study Guide Module 3 Notes Organizational Decision Making Decision Theory used to determine optimal strategies where a decision maker is faced with several alternatives and uncertain or risky pattern of future events Steps of Decision Making Process Identification of carious possible outcomes no control over the outcomes Identification of all the courses of action control over the actions Determination of the pay off function combinations of the acts and outcomes Choosing from among various alternatives on the basis of some criterion One Stage Decision Making Problems Identify courses of action in the face of possible events 1 2 Develop pay off and regret tables 3 Choose a course of action in accordance with some principle Example If a bookstore sells a particular book for 100 it purchases the book for 80 per copy and the unsold books can be disposed of for 30 each According to past experience the annual demand for this book is between 18 and 23 copies Pay off and Regret Tables Pay off Tables represent the matrix of the conditional values associated with all the possible combinations of the acts and the events Opportunity Loss or Regret is the amount of profit forgone by not adopting the optimal course of action or that which would give the highest pay off for each possible event D demand in units the E s Q quantity to be purchased the A s and P profit Requirements to Using Pay off Matrix Must not be a sequence of decisions Courses of action and events must be clearly determined Events of actions must be distinct mutually exclusive and collectively exhaustive Maximum Likelihood Principle Decision makers first consider the event that is most likely to occur and then decides the course of action which has the maximum conditional pay off Works in situations where the probability of a particular event may be predominately larger than the probabilities of other possible events Expectation Principle Best method for making decisions After assigning probabilities calculate the expected pay off for watch strategy Optimal choice will be strategy with highest expected pay off The more information we have the better If we have probabilities or estimated of probabilities it is better to use them then to not Of the two maximum likelihood principle or expected value expected value uses more information Decision Rules under Uncertainty Laplace principle based on philosophy that if we are uncertain about the various events then we may treat them as equally probable o Expected mean value of pay off for each strategy is determined and the strategy with the highest mean value is adopted unless we are dealing with cost in which case the lowest average cost is adopted o Since we don t know the probability of each quantity being demanded we assume they Maximin or minimax principle adopted by pessimistic decision makers who are conservative in are all equally probable their approach o Maximin deals with profit consider minimum pay offs resulting from the adoption of various strategies and choose the maximum profit o Minimax deals with cost consider max cost associated with each alternative choose the alternative that minimizes this max cost Maximax or minimin principle optimists principle of choice o Maximax suggests that for each strategy the max profit should be considered and the strategy with which the highest of these values is associated should be chosen o Minimin the minimum cost for each alternative is considered and then the alternative which minimizes the minimum cost is selected Multi Stage Decision Making Problems Evaluate the decision proceeding in a backward manner by evaluating the best course of action at the later stages to decide the best action at the earlier stages Method of Solution Rollback Technique Solution to the problem is obtained by working backwards from right to left through the tree o Assume we have reached various decision nodes on the tree and then decide on the optimal act conditional on having reached the node being analyzed o On reaching any decision node evaluate each of the alternative courses of action available there and select most appropriate
View Full Document
Unlocking...