Decision analysis del 2 Flashcards
Three usable approaches making decisions without information about probabilities of the states of nature:
Optimistic approach (Maximax)
Conservative approach (Maximin)
Minimax regret approach
Describe optimistic
Optimistic approach is used by an optimistic decision maker. The decision with the largest possible payoff is chosen.
(If costs is the measure, then the decision with the lowest cost)
Describe conservative approach
Conservative approach is used by a conservative decision maker. (Maximin)
For each decision the minimum payoff is listed and then the decision corresponding to the maximum of these minimum payoffs is selected. The minimum possible payoff is maximized.
If payoff is in costs, maximum costs is determined for each decision and then the decision corresponding to the minimum of these maximum costs is selected.
Describe minimax regret approach
Minimax regret approach requires the construction of a regret table or an opportunity loss table.
Calculate the difference of each payoff and the largest payoff, both for each state of the nature. The decision chosen is the one corresponding to the minimum of the maximum regrets.
When is expected value approach used?
Decision making with probabilites
Describe expected value approach
the expected return for each decision is
calculated by summing the products of the payoff
under each state of nature and the probability of
the respective state of nature occurring
– The decision yielding the best expected return is
chosen
What is the EV of decision alternative?
The expected value of a decision alternative is the sum of weighted payoffs for the decision alternative.
What to use when taking multi criteria decisions?
AHP and scoring method
Steps for scoring model:
Step 1: List the decision-making criteria
Step 2: Assign a weight to each criterion 1-9 –> Compare criteria and see which one is more important
Step 3: Rate how well each decision alternative satisfies each criterion
Step 4: Compute the score for each decision alternative. (Formula for scoring model). Compare.
Step 5: Order the decision alternatives from highest score to lowest score. The alternative with the highest score is the recommended alternative.
Describe AHP
Metod för att strukturerat fatta beslut när det finns flera motstridiga kriterier.
If you face challenges on putting numbers in the table, use AHP. AHP converts your knowledge into numbers for scoring method.
Steg för AHP
Step 1 = List the overall goal, criteria and decision alternatives
Step 2-5 must be performed for each criteria.
Step 2 = Develop a pairwise comparison matrix
Rate the relative importance between each pair of decision alternatives. The matrix lists the alternatives horizontally and vertically and has the numerical ratings comparing the horizontal (first) alternative with the vertical (second) alternative
Step 3 = Develop a Normalized matrix. Divide each number in a column of the pairwise comparison matrix by its column sum.
Step 4 = Develop the priority vector. Average each row of the normalized matrix. These
row averages form the priority vector of alternative preferences with respect to the particular criterion. The values in this vector sum to 1.
Step 5 = Calculate a Consistency Ratio. The consistency of the subjective input in the
pairwise comparison matrix can be measured by calculating a consistency ratio. A consistency ratio of less than .1 is good. For ratios which are greater than .1, the subjective input should be re-evaluated.
Step 6 = Develop a Priority Matrix. After steps 2 through 5 have been performed for all criteria, the results of step 4 are summarized in a priority matrix by listing the decision alternatives horizontally and the criteria vertically. The column entries are the priority vectors for each criterion.
Step 7 = Develop a Criteria Pairwise Development Matrix. This is done in the same manner as that used to construct alternative pairwise comparison matrices by using subjective ratings (step 2). Similarly, normalize the matrix (step 3) and develop a criteria priority vector (step 4).
Step 8 = Develop an Overall Priority Vector Multiply the criteria priority vector (from step 7) by the priority matrix (from step 6).
