Quantitative VS.

qualitative
decision making
Quantitative decisions are mostly based on
statistical analysis of collected data whereas
qualitative decisions are based on many
algorithms like type and quality of data,
factors that influence collected data, risk
assessments etc.
 difference
• While qualitative and quantitative analysis may
use information about the same
characteristic, qualitative methods rely on
information that is not easily measurable
while quantitative methods deal with data. ...
This qualitative information is hard to express as
numbers.
Examples of qualitative data
• Examples of qualitative data include sex (male
or female), name, state of origin, citizenship,
etc. A more practical example is a case
whereby a teacher gives the whole class an
essay that was assessed by giving comments
on spelling, grammar, and punctuation rather
than score.
Example of quantitative method..
• Quantitative methods emphasize objective
measurements and the statistical, mathematical, or
numerical analysis of data collected through polls,
questionnaires, and surveys, or by manipulating pre-
existing statistical data using
computational techniques.
Example..
• Quantitative Techniques in Decision Making | Management
• Technique # 1. Mathematical Programming: ...
• Technique # 3. Cost-Benefit Analysis: ...
• Technique # 4. Linear Programming: ...
• Technique # 5. Capital Budgeting: ...
• Technique # 7. Expected Value: ...
• Technique # 9. Simulation:
Constructing decision models
• Influence Diagrams
• Influence diagrams are a graphical tool for mapping
the interaction of the various elements of a decision
setting. They usually represent decisions with
rectangles; chance events or uncertainties with ovals
or circles; calculated or fixed inputs and outputs with
rounded rectangles, and outcomes or values with
triangles
Influence diagram
• The four shapes are referred to as nodes. Decision and
chance nodes are relatively straightforward. The rounded-
rectangle node is more complex, as it represents a variety of
elements of the decision setting. These may be measurable
or probabilistically derived values that serve as inputs to a
decision, characteristics of the chance nodes, or outcomes
from a combination of decisions and chance inputs. The
various nodes are assembled into a graph, with the
interaction between them indicated with arrows or arcs.
• A node at the beginning of an arc is a predecessor; a node at the end
is a successor.
• Figure 7.2 is an influence diagram for a land use decision faced by a
county zoning board for a request to rezone 10,000 acres from
agriculture to mixed-use residential and light commercial
development. The example nodes shown are greatly simplified for
this discussion. It is assumed that the problem diagnostic has
provided the decision makers with an appropriate decision context.
The problem is not limited to short-term considerations of jobs
produced or additional tax revenue.
• The problem diagnostic has generated sufficient baseline
information for the zoning board to incorporate the impact
of the development on a broader set of metrics, including
long-term infrastructure issues of water supply and quality,
transportation, social system sustainability indicators, and
environmental sustainability indicators. In addition, the
decision context has identified the three objectives as
economic benefits, optimized societal indicators, and
optimized environmental indicators
simpler example will illustrate some
characteristics of the decision-tree approach.
• Displaying Alternatives
• Let us suppose it is a rather overcast Saturday
morning, and you have 75 people coming for
cocktails in the afternoon. You have a pleasant garden
and your house is not too large; so if the weather
permits, you would like to set up the refreshments in
the garden and have the party there. It would be more
pleasant, and your guests would be more comfortable.
Decision tree example
• On the other hand, if you set up the party for the garden
and after all the guests are assembled it begins to rain, the
refreshments will be ruined, your guests will get damp, and
you will heartily wish you had decided to have the party in
the house. (We could complicate this problem by
considering the possibility of a partial commitment to one
course or another and opportunities to adjust estimates of
the weather as the day goes on, but the simple problem is all
we need.)
This particular decision can be represented
in the form of a “payoff” table:
Note…
• Much more complex decision questions can be portrayed in
payoff table form. However, particularly for complex
investment decisions, a different representation of the
information pertinent to the problem—the decision tree—is
useful to show the routes by which the various possible
outcomes are achieved.
Decision Making Without Probabilities

• The following example will illustrate the development

of a payoff table without probabilities. An investor is
to purchase one of three types of real estate, as
illustrated in Figure 12.1. The investor must decide
among an apartment building, an office building, and
a warehouse. The future states of nature that will
determine how much profit the investor will make are
good economic conditions and poor economic
conditions.
 Table 12.2. Payoff table for the real estate investments

State of Nature

Decision (Purchase) G OOD E CONOMIC C ONDITIONS P OOR E CONOMIC C ONDITIONS

Apartment building $50,000 $30,000

Office building 100,000 40,000

Warehouse 30,000 10,000

 Decision-Making Criteria

• Once the decision situation has been organized into a

payoff table, several criteria are available for making the
actual decision. These decision criteria, which will be
presented in this section, include maximax, maximin,
minimax regret , Hurwicz, and equal likelihood . On
occasion these criteria will result in the same decision;
however, often they will yield different decisions. The
decision maker must select the criterion or combination
of criteria that best suits his or her needs.
The Maximax Criterion …

• With the maximax criterion , the decision maker selects the decision that
will result in the maximum of the maximum payoffs. (In fact, this is how this
criterion derives its name maximum of a maximum.) The maximax criterion
is very optimistic. The decision maker assumes that the most favorable
state of nature for each decision alternative will occur. Thus, for example,
using this criterion, the investor would optimistically assume that good
economic conditions will prevail in the future.
• The maximax criterion results in the maximum of the maximum payoffs .
Table 12.3. Payoff table illustrating
a maximax decision
More…
• Although the decision to purchase an office
building will result in the largest payoff
($100,000), such a decision completely ignores
the possibility of a potential loss of $40,000. The
decision maker who uses the maximax criterion
assumes a very optimistic future with respect to
the state of nature.
• Before the next criterion is presented, it should be pointed out that the
maximax decision rule as presented here deals with profit . However, if the
payoff table consisted of costs, the opposite selection would be indicated:
the minimum of the minimum costs, or a minimin criterion. For the
subsequent decision criteria we encounter, the same logic in the case of
costs can be used.
• The Maximin Criterion
• In contrast to the maximax criterion, which is very optimistic, the maximin
criterion is pessimistic. With the maximin criterion, the decision maker
selects the decision that will reflect the maximum of the minimum payoffs.
For each decision alternative, the decision maker assumes that the
minimum payoff will occur. Of these minimum payoffs, the maximum is
selected. The maximin criterion for our investment example is
demonstrated in Table 12.4.
Table 12.4. Payoff table illustrating
a maximin decision
 The maximin criterion results in the maximum
of the minimum payoff .

• The minimum payoffs for our example are $30,000, $40,000, and $10,000. The
maximum of these three payoffs is $30,000; thus, the decision arrived at by using
the maximin criterion would be to purchase the apartment building. This decision
is relatively conservative because the alternatives considered include only the
worst outcomes that could occur. The decision to purchase the office building as
determined by the maximax criterion includes the possibility of a large loss
($40,000). The worst that can occur from the decision to purchase the apartment
building, however, is a gain of $30,000 . On the other hand, the largest possible
gain from purchasing the apartment building is much less than that of purchasing
the office building (i.e., $50,000 vs. $100,000).
Linear programming…
• Linear programming was revolutionized when CPLEX software was created
over 20 years ago: it was the first commercial linear optimizer on the market
written in the C language, and it gave operations researchers unprecedented
flexibility, reliability and performance to create novel optimization
algorithms, models, and applications. In fact, the name CPLEX itself is a pun
built on the concept of a Simplex algorithm written in C: C-Simplex gave
CPLEX. The Simplex algorithm, invented by George Dantzig in 1947 became
the basis for the entire field of mathematical optimization and provided the
first practical method to solve a linear programming problem. Of course,
CPLEX evolved over time to embrace and become a leader in the children
categories of linear programming, such as integer programming, mixed-
integer programming and quadratic programming, too.
 CPLEX.
• Depending on how familiar you are with linear
programming, you may be interested in various levels
of information around linear programming and how
they are handled by CPLEX. The information
presented below goes from the highest level
fundamental explanation of what linear programming
is (and how it runs in CPLEX) down to more advanced
notions. At the end, you will also find some external
classic references on linear programming.
Linear Programming: An essential
optimization technique
• If you’re a total newcomer to linear programming, you first may want to
see how business managers can use optimization to produce concrete,
measurable improvements in performance. As abstract as the
mathematics appears to be, it has powerful capabilities that enable
businesses to reduce costs, improve profitability, use resources effectively,
reduce risks, and provide benefits in many other key dimensions.
Furthermore, optimization can automate decision processes to improve
speed of responses and allow managers to focus their attention on critical
uncertainties rather than routine matters. And these benefits have been
demonstrated in numerous real-world implementations. Get your feet wet
by first understanding what optimization can do for your business.
linear programming
• The concept behind a linear programming problem is simple. It
consists for four basic components:
• Decision variables represent quantities to be determined
• Objective function represents how the decision variables affect
the cost or value to be optimized (minimized or maximized)
• Constraints represent how the decision variables use
resources, which are available in limited quantities
• Data quantifies the relationships represented in the objective
function and the constraints
linear programming
• In a linear program, the objective function and the constraints are
linear relationships, meaning that the effect of changing a decision
variable is proportional to its magnitude. While this requirement may
seem overly restrictive, many real-world business problems can be
formulated in this manner. That provides a powerful and robust
analytical methodology for supporting fact-based decision making.
For example: If you want to decide how to supply of each kind of
product in order to minimize your costs, you have to do that within a
set of constraints. For instance you have to be able to produce enough
to satisfy the demand on all your various products and you have to do it
within the capacity you have, which can produce units at a given cost.
In more mathematical terms, here’s what a linear program
would look like in the OPL language:

• Here’s an example linear program. A manufacturer wants to

sell a product. The product can either be made inside the
factory or purchased outside. Inside production uses scarce
capacity, and there is an inside cost per unit to manufacture.
Outside acquisition has a higher outside cost per unit to
purchase but uses none of the scarce capacity. Using both
sources, all demand must be satisfied. The goal is to
minimize total cost.
• For linear programming, there are fast
implementations of the primal simplex algorithm, the
dual simplex algorithm, the network simplex
algorithm, as well as a barrier method. All of these
algorithms use the automatic CPLEX pre-solve
algorithms to speed up performance.
• Examples of problems solved with linear
programming
• IBM ILOG CPLEX Optimization Studio can also
be a very good entry point for a hands-on
approach to learning linear programming.
Industry Problem

Blending

Economic Planning

Factory Planning

Manufacturing
Farm Planning

Food Manufacturing

Refinery planning

Supply chain Product deployment

Time tabling Manpower planning

Transportation Network flows

• Sometimes, linear relationships are not enough to capture
the essence of a business problem. This is particularly true
when decisions involve discrete choices, such as whether or
not to open a warehouse at a particular location. For these
situations, you need to use integer programming (or if the
problem includes both discrete and continuous choices, it is
a mixed integer program). Mixed integer programs can have
linear or convex quadratic objectives and linear, convex
quadratic or second-order cone constraints.
Examples of Mixed Integer Programming
Problems
• Vehicle routing
• Facility location
• Personnel scheduling
• Power plant commitment
• Costs with fixed and variable components
• Materials cutting
• Network design