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Finals Topic 4 Expected Value With Perfect Information & Decision Tree Analysis

Management Science (according to Sinduja on Business Management Ideas) ➔ is a problem-solving process used by an interdisciplinary team to develop mathematical models that represent simple-to-complex functional relationships and provide management with a basis for decision-making and a means of uncovering new problems for quantitative analysis”.

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19 views44 pages

Finals Topic 4 Expected Value With Perfect Information & Decision Tree Analysis

Management Science (according to Sinduja on Business Management Ideas) ➔ is a problem-solving process used by an interdisciplinary team to develop mathematical models that represent simple-to-complex functional relationships and provide management with a basis for decision-making and a means of uncovering new problems for quantitative analysis”.

Uploaded by

jamesbenedict.bantiling.21
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Expected Value of

Perfect Information
Part 2 Quantitative Techniques
Decision Making with Probabilities or
Decision Making under RISK
Decision Making with Probabilities
(or Decision Making under Risk)

Expected Value Expected Value


(EV or EMV) of Perfect
Information
(EVPI)
Expected Value of Perfect Information
PERFECT INFORMATION
- The knowledge that a future state of nature (event) will occur with certainty
- assumed that the probability distribution is an accurate representation of the relative
frequency of future demand and that the decision maker knows exactly when each possible
event will occur

EXPECTED VALUE OF PERFECT INFORMATION (EVPI)


→ Expected Value with Perfect Information – Expected Value without Perfect Information
Decision Tree
Analysis

Part 3 Quantitative Techniques


Decision Tree Analysis
Decision Tree
- A graphic representation of the:
(1) decision points,
(2) alternative courses of action available to the decision maker,
(3) possible outcomes from each alternative,
(4) the relative probabilities and
(5) the expected values of each event

Advantages of using Decision Tree


→ facilitate the evaluation of alternatives by giving the decision maker a visual presentation of
the expected results of each alternative
→ Useful when sequential decisions are involved
Decision Tree Analysis
Limitations of Decision Tree
→ May be difficult to determine all the possible events, outcomes and their probabilities
→ a case involving so many events and sequential decisions may result into a more complex
decision tree which may not be that easy to use

STEPS IN PREPARING A DECISION TREE


1) Identify the decision points and the chance points
2) Determine events that may result from the chance points
3) Estimate the outcomes (payoffs) of each event, as well as their estimated probabilities
4) Compute the expected values of outcomes
5) Evaluate the results and choose the best course of action
20.2

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