DECISION ANALYSIS

FIRST YEAR REQUIRED COURSE PACKET

Quarter III
Spring, 2009

Table of Contents: Click on the links below to be directed to that

section of this syllabus

FACULTY

COURSE DESCRIPTION

COURSE OUTLINE AND CASES

REQUIRED MATERIALS
 DECISION ANALYSIS
Quarter III, Spring 2009

FACULTY

Section I: Robert Carraway

Section II: Sam Bodily
Section III: Sam Bodily
Section IV: Casey Lichtendahl
Section V: Casey Lichtendahl
Coursehead: Sam Bodily

COURSE DESCRIPTION

Business leaders and managers make countless decisions, both large and small, some of these
decisions warrant careful consideration, some can be nearly automated. Regardless of the
differences among them, nearly all business decisions are complicated by the presence of
uncertainty.

Uncertainty exists in business because managers must choose a course of action before they can
know exactly what outcome will transpire; put simply, it exists because the future is unknowable.
By extension, managers must choose between competing courses of action before they can know
which action will lead to the most-desired outcome. We say that uncertainty gives rise to risk: if
we agree that a manager must choose a course of action without knowing its precise outcome,
then risk is the degree to which the actual outcome might deviate from the manager’s
expectations.

All too often, decision makers make risky choices from a qualitative gut reaction. This behavior
is understandable: the human mind has both cognitive and emotional difficulties in dealing with
risk. This course seeks to improve on that behavior. In fact, this course is based on these claims:

1. Nearly all business decisions can be evaluated quantitatively: that is, the influencing
factors and potential outcomes for any decision can be represented and understood
numerically. Objectives that are not strictly economic can be included.

2. Individual judgment and intuition based on experience can be incorporated into the
quantitative approach.

3. Business people will achieve consistently-better outcomes when they explicitly

incorporate risk into their decision-making.

This course will discuss analytical methods that decision-makers use to gain insight into risk and
uncertainty. The course will help the student develop skill and sophistication in artfully using these
methods. Students will indeed become better decision makers, and they will also gain the ability to
proactively manage risk in creative ways.

The course emphasizes the design of analyses to fit circumstances and interpretation of results; it
does not emphasize the mastery of sophisticated mathematical techniques. It studies and
integrates individual judgment and personal intuition in realistic business situations with the

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most-widely applicable methodologies of decision and risk analysis, probability and statistics,
competitive analysis, and management science. The goal is always the quality of the decisions
made in light of better analysis and deeper thinking, rather than simply the analysis itself.

The first half of the DA course (Fall, Quarter 1) will focus more on a general framework for
thinking about and managing risk. Students will become comfortable using the language of
probability distributions to describe the uncertainty they face, and simulation as a tool to explore the
impact of that uncertainty on the decisions with which they are faced. We will consider situations
involving uncertain future cash flow streams, and the role of the timing of those cash flows on the
valuing of opportunities. We will consider the role data can play in shaping our calibration of
future uncertainties, specifically touching on the use of parametric probability distributions as a
way to describe uncertainty, sampling as a source of data, and regression as a tool to capture the
relationship between uncertain quantities and thereby produce better forecasts. Along the way students
will gain skill in spreadsheet modeling.

The second half of the course (Spring, Quarter III) will build on the first by focusing more on
ways to proactively manage risk, particularly through identifying and/or creating opportunities to
add value and/or reduce risk through the sequencing of decisions. We will consider the value of
acquiring additional information before decisions have to be made, as well as the value of
strategies to reduce (or eliminate) risk at the time of decision. We gain experience with assessing
uncertainties and forecasting probability distributions. We also consider ways to address
competitive situations, where uncertainty includes being unsure about the behavior of a
competitor. We learn how we may choose to influence an active competitor capable of
anticipating our actions and responding to them (in part, via analysis of matrix games).

Objectives

ƒ To develop a process for knowing when and how to do managerially relevant

analysis under conditions of uncertainty, many decision variables, and unstructured
contexts, using both data and personal judgment.

ƒ To develop a framework for understanding uncertainty, a language for describing

uncertainty and methodologies for making decisions in light of uncertainty, all
through field case studies about practicing managers.

ƒ To provide basic skills and a deep conceptual understanding of the most widely
applicable methodologies of decision and risk analysis, probability and statistics,
competitive analysis, and management science.

REQUIRED MATERIALS

The cases and technical notes included in the case packet are part of the required course
materials. Students will use these to prepare prior to each class meeting. Some days there will be
available an electronic spreadsheet containing data from the case to save the time of entering the data.
There are occasionally also online learning modules made available to you. These can be tutorials, or
demonstrations of software or a computing task. Electronic spreadsheets can save you time and
learning modules can be very valuable. Electronic items are linked from assignments or
found in the DA Course Folder.

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On some class days there are detailed assignment questions that suggest specific steps in
preparing for class. These days tend to be skill-building days and may be based on expository
reading about methodology to be mastered in carrying out your analysis. On other days, only the
case is indicated with a single or, perhaps, no assignment question. This does not mean that no
preparation is needed. Indeed, the task for the student includes diagnosing the situation and
structuring an approach to the analysis from the case itself, as well as carrying out the analysis.
Later, in your future work, you will find the ability to diagnose and structure key to your success
against the ambiguity in the world—acquiring these abilities and some accompanying judgment is
not easy, yet very valuable to you.

DA Course Folder

From the Darden Portal, you can find the DA Course Folder starting from My  Courses by
selecting DA. Inside the DA Course Folder you will find a folder named CaseData, containing the
same spreadsheets that are linked from assignments; a folder Post-ClassReadingViewing, where items
are occasionally posted after class; and an Optional folder for supplemental readings and practice
exercises. The contents of these folders will clearly change as we go along without notification to
you, and you will benefit from checking these folders from time to time, perhaps at the end of a week
before you start the next week preparation.

Supplemental Library Materials

In addition, a list of supplementary references follows. These texts are available in the Darden
Library. Since the course approaches topics from a pragmatic, decision-oriented perspective,
students should, in general, be wary of devoting much time to reading any text. Better sources of help
include your discussion group, your instructor, and the second-year tutoring program.
Nonetheless, of the supplementary references, the first three are among the best.

Bell, D.E., and Schleifer, A. Jr., Decision-making under uncertainty, Cambridge, MA,
Course Technology, Inc. 1995.
Bodily, S.E., R.L. Carraway, S.C. Frey, Jr., and P.E. Pfeifer, Quantitative Business
Analysis: Text and Cases. New York: Irwin McGraw-Hill, 1998.
Brightman, H.J., Statistics in plain English. Cincinnati, OH: South-Western Publishing Co.,
1986.
Clemen, R.T., Making hard decisions: An introduction to decision analysis. Boston:
PWS-Kent Publishing Company, 1991. (or any successor editions)
Curwin, J. and R. Slater, Numeracy Skills for Business, London: Chapman & Hall, 1994.
Eppen, G.D., F.J. Gould, and C.P. Schmidt, Introductory management science, second
edition. Englewood Cliffs, NJ: Prentice-Hall, Inc., 1987.
Freedman, D., R. Pisani, and R. Purves, Statistics. New York: W.W. Norton & Company,
Inc., 1978.
Hamburg, M., Statistical analysis for decision making, fourth edition. New York:
Harcourt Brace Jovanovich, Publishers, 1987.
Holloway, C.A., Decision making under uncertainty. Englewood Cliffs, NJ: PrenticeHall,
Inc., 1979.
Keeney, R.L., Value-focused thinking: A path to creative decision-making. Harvard
University Press, 1996.
Kirkwood, C.W., Strategic decision making: Multi-objective decision analysis with
spreadsheets. Belmont, CA: Duxbury Press, 1997.

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 Lapin, L.L., Statistics for modern business decisions, second edition. New York:
Harcourt Brace Jovanovich, Publishers, 1978.
Plane, D.E., Management science: A spreadsheet approach. Danvers, MA: Boyd &
Fraser Publishing, 1994.
Powell, S. G. and K.R. Baker, Management Science: The Art of Modeling with
Spreadsheets, 2nd Edition, Hoboken, N.J., 2007.
Ragsdale, C.T., Spreadsheet modeling and decision analysis: A practical introduction to
management science. Cambridge, MA, Course Technology, Inc., 1995.
Rosenthal, J.S., Struck by lightning: The curious world of probabilities. Washington,
D.C.: Joseph Henry Press, 2006.

GRADING

Class participation and exams will be weighted as follows:

Q1 (Fall)
Participation in Q1 (Fall) section discussions 40%
Midterm exam (end of Q1) 60%
Q3 (Spring)
Participation in Q3 (Spring) section discussions 40%
Final exam (end of Q3) 60%

You will receive an interim grade at the end of the Q1 (Fall) term based solely on Q1
performance, and a final grade at the end of the Q3 (Spring) term that will be based equally on the
Q1 and Q3 terms. The final exam is directed principally towards spring material, yet it will
utilize comprehensive skills and understanding acquired in the topics of the entire course,
fall included.

While we fully expect that your preparation will be informed by discussions with your learning team
members and classmates, we strongly encourage you to try to prepare the cases on your own.
Indeed, on occasion we recommend (and in some cases specifically request) that you not meet with
your learning team prior to class.

It is school policy that, prior to your class session, you not discuss the case assigned to that class
with anyone who has sat through a previous (or simultaneous) class discussion of the case. This
includes (1) second-year students who had the case the previous year, (2) fellow first-year
students from other sections who had the class earlier in the day, and (3) others outside the
school who may have had the case in class (this includes analyses of the case posted
electronically, for which you do not know if the author had the case in class or not). Our
primary motivation for this policy is that the side discussion and information impairs the
pedagogical design of many classes and can interfere with your learning process and your entire
section’s learning. A secondary motivation is that this may (emphasis on may) be unfair and give
you an advantage over your peers in terms of your class participation grade. An implication of
this policy is that you need to be very careful about discussing the content of your class
discussions during breaks between classes (such as with learning team members who have yet to
have the class), as we want to prevent any spillover of information from your section to others,
even inadvertent spillover through overheard conversations. Along the same lines, students may

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realize that it is not that helpful to do exhaustive web searches of company situations portrayed in
cases, with the aim of gaining insight from hindsight. You are preparing for situations where you will
not have hindsight information and you may as well get ready for that now.

Finally, it is a fundamental belief of the DA faculty that people learn best through active
engagement. Therefore, participation in class is an essential part of your learning experience.
There are many effective ways to participate in class discussions, regardless of your
selfperceived level of quantitative skill and expertise, ranging from asking good questions to
articulating ideas and insights that will help foster the learning and understanding of the entire
section. This belief is reflected in the way we both conduct class and assess class participation
grades. It is not sufficient to master the material for oneself: true mastery requires developing the
ability to articulate ideas in ways that help enlighten others. We believe that without the ability
to explain your analysis and use it to persuade others to adopt your recommended course of action,
even the best analysis can have little substantive impact.

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 Decision Analysis
Course Outline, Quarter III, Spring 2009

SPRING
 Week 

Materials
 Class 

 Date 
Hardcopy in Packet Other* Topic
Decision Trees and Downstream Decisions
23 1 20-Jan-09 Freemark Abbey Winery Freemark.xls Value of Information, Value of
Value of Information and Control tree170a.xla Control, Risk Aversion
Decision Trees Using TreePlan
Decision Analysis
23 2 21-Jan-09 Probability Assessment Exercise Global Link to Movie Forecasting Probability Assessment
Forecasting BoxOffice Receipts Activity

23 3 22-Jan-09 Orion Controls (A) (UVA-QA-0602) Downstream Decisions

24 4 28-Jan-09 Merck & Company: Product KL-798
(UVA-QA-0582) Decision Tree Practice
24 5 29-Jan-09 Orion Controls (B) (UVA-QA-0603) Downstream Decisions with
Continuous Uncertainties

25 6 3-Feb-09 Chance Encounters (UVA-QA-0601) Chance Encounters data.xls Real Options

Competitive Analysis
25 7 4-Feb-09 CK Coolidge, Inc. Competitive Analysis

25 8 5-Feb-09 Germania Fluggesellschaft MBH (A) Structuring Competitive Analysis

(UVA-QA-0620)
Structuring a Competitive Analysis: Decision
Trees, Decision Forests, and Payoff Matrices

26 9 9-Feb-09 Lesser Antilles Lines: The Island of San Huberto Link to online competition Matrix Game Analysis
(UVA-QA-0355)
Competitor Analysis

26 10 10-Feb-09 Bidding for The Legacy Hotel BiddingLegacy.xls Competitive Bidding

(UVA-OB-0807) Update on Forecasting
26 11 11-Feb-09 Maxco, Inc. and the Gambit Company Competitive Bidding
27 12 16-Feb-09 Negotiation Analysis: An Introduction Negotiation Analysis
Saving Troubled Stutts Corporation: Widely
Known Information
(UVA-QA-0712)
Instructions for Saving Troubled Stutts
Corporation Exercise
(UVA-QA-0715)
Integration
27 13 17-Feb-09 Airbus And Boeing: Superjumbo Decisions Airbus and Boeing - GFB Downstream Decisions with
(UVA-QA-0720) Model.xls Competition

28 14 25-Feb-09 Brockway and Coates Review and Summary Case

28 15 26-Feb-09 *Electronic spreadsheets or Movie Experiment Wrap-up
online learning module
4-Mar-09 Exam