Decision analysis Flashcards
What is the definition of Decision Analysis?
A structured approach to making decisions, especially under uncertainty.
What is the objective of Decision Analysis?
To identify the best course of action based on available information.
What are the components of Decision Analysis?
- Decision alternatives
- States of nature
- Payoffs
What are Decision Alternatives in a decision problem?
The possible strategies a decision-maker can choose.
What are States of Nature in decision-making?
Future events that impact decision outcomes.
What is a Payoff Table?
A table that shows the consequences for all decision-state combinations.
In a Payoff Table, what are the payoffs for decision d1 (Expand Factory) under states of nature s1 (High Demand) and s2 (Low Demand)?
- s1: €50,000
- s2: €10,000
In a Payoff Table, what are the payoffs for decision d2 (Do Nothing) under states of nature s1 (High Demand) and s2 (Low Demand)?
- s1: €20,000
- s2: €15,000
What does an Influence Diagram represent?
A graphical representation of a decision-making problem.
What do squares/rectangles represent in an Influence Diagram?
Decision nodes.
What do circles/ovals represent in an Influence Diagram?
Chance events (uncertainties).
What do diamonds represent in an Influence Diagram?
Consequences.
What is a Decision Tree?
A graphical tool showing sequential decision-making over time.
What do Decision Nodes represent in a Decision Tree?
Choices available.
What do Chance Nodes represent in a Decision Tree?
Uncertain outcomes.
What do the branches in a Decision Tree represent?
Possible actions and outcomes.
What are End Nodes in a Decision Tree?
They show the payoff.
What is the Optimistic Approach in decision-making?
The decision-maker chooses the alternative with the highest possible payoff.
What is the Conservative Approach in decision-making?
The decision-maker chooses the option that maximizes the minimum possible payoff.
What is the Minimax Regret Approach?
Focuses on minimizing regret from making the wrong decision.
What are the steps in the Minimax Regret Approach?
- Construct a regret table
- Identify maximum regret for each decision
- Choose the decision with the lowest maximum regret
What is the Expected Value (EV) Approach?
Used when probabilities of states of nature are known.
What is the Expected Value (EV) formula?
EV(di)=∑P(sj)Vij
In the EV formula, what does P(sj) represent?
Probability of state sj.
In the EV formula, what does Vij represent?
Payoff for decision di under state sj.
How is the Expected Value calculated for Model C in the example?
EV(C)=(0.4×6,000)+(0.2×16,000)+(0.4×21,000) = €14,000
What does Expected Value of Perfect Information (EVPI) measure?
How much knowing the future would improve decision-making.
What is the formula for EVPI?
EVPI=EVwith perfect information−EVbest decision
What is a Scoring Model in Multicriteria Decision Analysis?
Used when multiple criteria are involved.
What are the steps in a Scoring Model?
- Assign weights to criteria
- Rate each alternative against each criterion
- Compute total scores and choose the highest
What is the Analytic Hierarchy Process (AHP)?
Breaks down complex decisions into a hierarchy.
What are the steps in the Analytic Hierarchy Process (AHP)?
- Define goal
- Identify criteria
- Compare alternatives pairwise
- Calculate weighted scores
- Select best alternative
What is the main purpose of Decision Analysis?
Helps choose the best strategy under uncertainty.
True or False: The Optimistic, Conservative, and Minimax Regret methods work when probabilities are known.
False
What does EVPI show?
How much value perfect information would add.
What are the two methods discussed for Multicriteria Decision Making?
- Scoring Model
- Analytic Hierarchy Process (AHP)
