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    Decision Analysis: Monday, 5 September 2022 11:09 Am

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    Timothy james Palermo
    Decision analysis is used to develop an optimal strategy when a decision maker faces multiple alternatives with uncertain outcomes. It involves formulating the problem by identifying chance events, consequences of decisions and events, decision alternatives, and states of nature. Influence diagrams and payoff tables can be used to graphically represent relationships between decisions, events, and consequences. Decision trees are also used as they provide a chronological representation of the decision process and alternatives. Expected value analysis incorporates probabilities to evaluate alternatives based on weighted payoffs when probability assessments are available.

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    Decision Analysis: Monday, 5 September 2022 11:09 Am

    Uploaded by

    Timothy james Palermo
    7 views3 pages
    Decision analysis is used to develop an optimal strategy when a decision maker faces multiple alternatives with uncertain outcomes. It involves formulating the problem by identifying chance events, consequences of decisions and events, decision alternatives, and states of nature. Influence diagrams and payoff tables can be used to graphically represent relationships between decisions, events, and consequences. Decision trees are also used as they provide a chronological representation of the decision process and alternatives. Expected value analysis incorporates probabilities to evaluate alternatives based on weighted payoffs when probability assessments are available.

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    Decision analysis is used to develop an optimal strategy when a decision maker faces multiple alternatives with uncertain outcomes. It involves formulating the problem by identifying chance events, consequences of decisions and events, decision alternatives, and states of nature. Influence diagrams and payoff tables can be used to graphically represent relationships between decisions, events, and consequences. Decision trees are also used as they provide a chronological representation of the decision process and alternatives. Expected value analysis incorporates probabilities to evaluate alternatives based on weighted payoffs when probability assessments are available.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    7 views3 pages

    Decision Analysis: Monday, 5 September 2022 11:09 Am

    Uploaded by

    Timothy james Palermo
    Decision analysis is used to develop an optimal strategy when a decision maker faces multiple alternatives with uncertain outcomes. It involves formulating the problem by identifying chance events, consequences of decisions and events, decision alternatives, and states of nature. Influence diagrams and payoff tables can be used to graphically represent relationships between decisions, events, and consequences. Decision trees are also used as they provide a chronological representation of the decision process and alternatives. Expected value analysis incorporates probabilities to evaluate alternatives based on weighted payoffs when probability assessments are available.

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    Decision Analysis

    Monday, 5 September 2022 11:09 am

    Decision analysis - used to develop and optimal strategy when a decision makers is faced with
    several decision alternatives and uncertain or risk-filled pattern of future events

    Problem Formulation

    - Chance events - uncertain future events


    - Consequences - combination of decision alternative and chance event outcomes
    - Decision alternatives - different possible strategies the decision maker can employ
    - States of nature - future events that are not under the control of the decision maker

    Influence diagrams - graphical device that shows the relationships among the decisions, chance
    events, and the consequences for a decision problem

    Nodes- represent decisions, chance events, and consequences

    - Decision nodes

    - chance nodes

    - consequence nodes

    - referred to as arcs; shows the direction of influence

    Payoff tables

    Payoff - consequence resulting from a specific combination of a decision alternative and a state
    of nature; a table that shows payoffs is called a payoff table

    Decision trees

    - Graphical representation for the decision-making process

    DECISION MAKING WITHOUT PROBABILITIES

    • Optimistic approach - decision with the largest payoff or lowest cost; also known as maximax

    Pre-mid coverage Page 1


    • Conservative approach - evaluates in terms of the worst payoff that can occur. Alternative recommended is the one that
    provides the best of the worst possible payoff

    • Minimax regret approach - decision making one would choose the decision alternative that minimizes the maximum state of
    regret that could occur over all possible states of nature
    ○ Regret - represents how much potential payoff one would forgo by selecting a particular decision alternative; referred to
    as opportunity loss

    DECISION MAKING WITH PROBABILITIES


    - When probability assessments for the states of nature are available, use the expected
    value approach
    Expected value of a decision alternative is the sum of weighted payoffs for the decision
    alternative

    Decision Tree - chronological representation of the decision problem

    Expected value with perfect information (EVwPI) -

    Expected Value of Perfect Information (EVPI) - increase in the expected profit that would
    result if one knew with certainty which state of nature would occur

    FORMULAS TO REMEMBER:

    Efficiency = (EVSI/EVPI)x100

    EVPI = |EVwPI - EVwoPI

    EVSI ={ [ Probability favorable( EV) + probability unfavorable(EV) ] - EVwoPI }

    Joint probability P(Sₐ I F/U) : Prior probability P(Sₐ) X Conditional Probability P(F or
    U I Sₐ)

    Pre-mid coverage Page 2


    Posterior Probability: ∑ Joint probability P (F or U I Sₐ) / Joint probability of Sₐ P(F I
    Sₐ)

    Pre-mid coverage Page 3

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