Decision Analysis
Decision Analysis
Decision Analysis
To accompany
Quantitative Analysis for Management, Eleventh Edition, Global Edition
by Render, Stair, and Hanna
Power Point slides created by Brian Peterson
Introduction
STATE OF NATURE
FAVORABLE UNFAVORABLE
ALTERNATIVE MARKET ($) MARKET ($)
Construct a large plant 200,000 –180,000
Do nothing 0 0
Table 3.1
STATE OF NATURE
CRITERION
FAVORABLE UNFAVORABLE OF REALISM
ALTERNATIVE MARKET ($) MARKET ($) ( = 0.8) $
Construct a large
200,000 –180,000 124,000
plant
Realism
Construct a small
100,000 –20,000 76,000
plant
Do nothing 0 0 0
Table 3.4
Copyright © 2012 Pearson Education 3-12
Equally Likely (Laplace)
Considers all the payoffs for each alternative
Find the average payoff for each alternative.
Select the alternative with the highest average.
STATE OF NATURE
FAVORABLE UNFAVORABLE ROW
ALTERNATIVE MARKET ($) MARKET ($) AVERAGE ($)
Construct a large
200,000 –180,000 10,000
plant
Construct a small
100,000 –20,000 40,000
plant
Equally likely
Do nothing 0 0 0
Table 3.5
200,000 – 0 0–0
Table 3.6
STATE OF NATURE
FAVORABLE UNFAVORABLE
ALTERNATIVE MARKET ($) MARKET ($)
Construct a large plant 0 180,000
Do nothing 200,000 0
Table 3.7
STATE OF NATURE
FAVORABLE UNFAVORABLE MAXIMUM IN
ALTERNATIVE MARKET ($) MARKET ($) A ROW ($)
Construct a large
0 180,000 180,000
plant
Construct a small
100,000 20,000 100,000
plant
Minimax
Do nothing 200,000 0 200,000
Table 3.8
STATE OF NATURE
FAVORABLE UNFAVORABLE
ALTERNATIVE MARKET ($) MARKET ($) EMV ($)
Construct a large
200,000 –180,000 10,000
plant
Construct a small
100,000 –20,000 40,000
plant
Do nothing 0 0 0
Probabilities 0.50 0.50
STATE OF NATURE
FAVORABLE UNFAVORABLE
ALTERNATIVE MARKET ($) MARKET ($) EMV ($)
Construct a large
200,000 -180,000 10,000
plant
Construct a small
100,000 -20,000 40,000
plant
Do nothing 0 0 0
With perfect
200,000 0 100,000
information
EVwPI
Probabilities 0.5 0.5
Table 3.10
Copyright © 2012 Pearson Education 3-23
Expected Value of Perfect
Information (EVPI)
The maximum EMV without additional information is
$40,000.
EVPI = EVwPI – Maximum EMV
= $100,000 - $40,000
= $60,000
Favorable Market
A Decision Node
1
Unfavorable Market
uct nt
r
n st Pla
e
Co a r g
L Favorable Market
Construct
2
Small Plant Unfavorable Market
Do
No
th
in
g
Figure 3.2
Re y (
e
ga lts 5) ge
Lar Favorable Market (0.27)
t
Plant –$30,000
M
t
uc
No Plant
–$10,000
nd
Co
$106,400
a rge $63,600 Favorable Market (0.78)
L $90,000
Small
5) Unfavorable Market (0.22)
0.4 Plant –$30,000
(
e y ts le
rv ul ab No Plant
Su Res vor –$10,000
Su Fa –$87,400 Favorable Market (0.27)
rv $190,000
e
y
Re y (
e
Plant –$30,000
Mt
uc
No Plant
–$10,000
d
on
$49,200
C