Chapter 3: Decision Analysis

a tool comprising of different methodologies necessary to address decision in quantitative manner

a systematic, quantitative and interactive approach to addressing and evaluating important choices

used to develop an optimal strategy when a decision maker is faced with several decision alternatives

from optimization and optimal solution where decision analysis starts from formulating problem

It is the first step in the decision analysis process

Parts of Problem Formulation

are the different possible strategies the decision maker can employ

uncertain future events or weak demand, moderate demand, strong demand

consequences resulting from decision alternatives and chance events

Management scientist and professor from Stanford University that defined the decision analysis discipline in 1964 and has played a major role in the research, education, and application of many aspects of the field.

Approaches in Decision Making without Probabilities (Decision Making under Uncertainty)

Approaches in Decision Making with Probabilities (highest expected value (EV) or decision with best expected return)

a chronological representation of the decision problem

largest possible payoff/ largest in strong demand (favorable market)

Maximax/ Maximum of all maximum

maximum of the minimum payoff is selected/ largest in weak demand (unfavorable market)

Maximin/ Maximum of all minimum

best weighted payoff/ highest average payoff for each alternative

Equally Likely

minimum of the maximum regret

difference between large and small payoffs from each payoff

Minimax/ Minimum of all maximum