Decision analysis using excel qm in this tutorial, we will work through a problem using decision analysis in excel qm. Maximin implies the maximisation of minimum payoff. According to rawls, the principle of greatest equal. There are some similarities in the approaches used by game theory and decision analysis.
High demand h low demand l produce 30,000 29 12 produce 20,000 18 8 produce 12,000 3 11 2. A systematic, quantitative and visual approach to addressing and evaluating important choices confronted by businesses. Decision analysis part 1 decision analysis and decision tables decision analysis, part 1 introduction to decision analysis concepts. Pdf portfolio decision analysis with maximin criterion. There are four types of criteria that we will look at.
In portfolio investment, the portfolio is chosen to maximize the minimum return over all past observation periods for a given level of return. The decision maker therefore chooses the outcome which is guaranteed to minimise his losses. Stages relation of da to some other disciplines decisionmaking under uncertainty decisionmaking under strict uncertainty. Examine only the best possible outcome for each alternative. Maximin, maximax and minimax regret are three approaches to decision making under uncertainty. The preceding chapter describes how game theory also can be used for certain kinds of decision making in the face of uncertainty. Ds decision analysis decision support 201819 jozefstefan international postgraduate school ljubljana, slovenia 5 minimax regret the regret r ij for the alternative a j in state i is equal to the difference between the best alternative in given. Decision analysis is the formal study of how people make decisions, particularly when faced with uncertain information, as well as a collection of techniques to support the analysis of decision problems. Expected value realist compute the expected value under each action and then pick the action with the largest expected value. Here we discuss various possible approaches to decision analysis, as well as their strengths and. View homework help chapter 3 decision analysis solution 316 to 3 30.
Decision theory steps involved in decision theory approach. Decision analysis provides a framework and methodology for rational decision making when the outcomes are uncertain. The investor would look at the worst possible outcome at each supply level, then selects the highest one of these. Payoff tables show the payoff profit or loss for the range of possible outcomes based on two factors different decision. Decision making under risk is presented in the context of decision analysis using different decision criteria for public and private decisions based on decision criteria, type, and quality of available information together with risk assessment. A compromise between an optimistic and pessimistic decision a coefficient of realism, is selected by the decision maker to indicate optimism or pessimism about the future 0 maximin solution12030 20 50 120 30 200 90 40 large factory average factory small factory weak economy. Decision analysis provides a framework and methodol. Select the best decision, using the following decision criteria.
Decision analysis theory to accompany quantitative analysis for management, 8e by renderstairhanna. Decision making under uncertainty thedecisionmakerthe decision maker does not knowdoes not know the probabilities of the various outcomes type 3. You make the best decision based on your analysis and the information you have at the time with the current situation but. Alternative criteria for decisionmaking under uncertainty. The solution provides step by step method for the calculation of maximax, maximin, minimax regret, hurwick and equal likelihood decision rules. This is a problem perfect for decision analysis, the subject of this chapter. Maximax decision maximin decision minimax regret decision maximumweighted decisions decision making without probabilities 3 18 suppose you have to decide on one of three choices for your business. Decision analysis allows us to select a decision from a set of possible decision alternatives when uncertainties regarding the future exist.
Making decision from payoff table by using maximax, maximin, hurwicz, laplace and emv method. Read this article to learn about the decision types, decision framework and decision criteria of statistical decision theory. Decision making under uncertainty example problems. Best of the worst select the decision that results in the maximum of the minimum rewards a very pessimistic decision criterion. Decisionmaking under uncertainty in quantitative techniques. A decision problem, where a decision maker is aware of various possible states of nature but has insufficient information to assign any probabilities of occurrence to them, is termed as decision making under uncertainty. The maximin rule involves selecting the alternative that maximises the minimum payoff achievable. The optimal decision is to buy 2 30second commercials. This criterion, also known as the criterion of pessimism, is used when the decisionmaker is pessimistic about future. Formula for the calculation and interpretations of the results are also included.
Examine only the worst possible outcome for each alternative. Mickey lawson is considering investing some money that he inherited. Decision criterion maximin pessimist using the decision matrix of, and using the maximin pessimist decision criterion. Events ecological ecological actions awareness awareness rises falls min j ua i. The goal is to optimize the resulting payoff in terms of a decision. Determine the various alternative courses of actions from which the final decision has to be made. Deciding based on the best possible outcome the maximax is one approach. Decision analysis under uncertainty christopher grigoriou executive mbahec lausanne 2007 2008. Decision analysis jozef stefaninternational postgraduate school, ljubljana. Payoff tables show the payoff profit or loss for the range of possible outcomes based on two factors. Minimax sometimes minmax, mm or saddle point is a decision rule used in artificial intelligence, decision theory, game theory, statistics, and philosophy for minimizing the possible loss for a worst case maximum loss scenario. Attitudes to risk by individuals here we look at the decision makers attitude to risk. Maximin, maximax and minimax regret decision criteria rules. Decision making under uncertainty in quantitative techniques for management decision making under uncertainty in quantitative techniques for management courses with reference manuals and examples pdf.
The following payoff table gives the profits that would be realized during the next year for each of three investment alternatives he is considering. Decision making under risk the decision maker knows the probabilities of the various outcomes. Fundamentals of decision theory university of washington. Steamboat fulton, death ray, and sadistic scott are the three management science professors who teach the courses. Second, he argues that if the parties employed the maximin decision rule, they would as a matter of course, choose his principles of justice over any other principles. Apply the techniques of maximax, maximin, and minimax regret to decision making problems including the production of profit tables. Compute the worst minimum outcome for each choice very pessimistic.
Describe the decision making environments of certainty and uncertainty. Portfolio decision analysis with maximin criterion in the malaysian stock market article pdf available in applied mathematical sciences 6110. Decision analysis is a rational approach to decision making for problems where uncertainty f igures as a prominent element. Decision analysis learning objectives decision making under uncertainty make maximizing and minimizing. The maximin payoff criterion if the decision makers problem were to be viewed as a game against nature,then game theory would say to choose the action according to the minimax criterionas described in sec. Each of these criteria make an assumption about the attitude of the decision maker. Brooke bentley, a student in business administration, is trying to decide which management science course to take next quarter i, ii, or iii.
University of nova gorica decision analysis part 1 decision analysis and decision tables decision analysis, part 1 introduction to decision analysis. This is the only method of the four that incorporates the probabilities of. Maximin each alternative is represented by its worst possible consequence. Decision theory is the study of how people make choices. When dealing with gains, it is referred to as maximinto maximize the minimum gain. When dealing with gains, it is referred to as maximin to maximize the minimum gain. Pdf portfolio decision analysis with maximin criterion in. The risk associated with any decision alternative is a direct result of the uncertainty associated with the final consequence. A formal model is developed to represent the decision problem, facilitate logical analysis, and prescribe a.
Decision maker knows with certainty the consequences of every alternative or decision choice type 2. Here we look at the decision makers attitude to risk. Jan 02, 2010 maximin, maximax and minimax regret decision criteriarules decision makers may use any one of the above criteria to make decisions in the following situations. If, say, you decide that expanding your product line is a good move, what leads you to that conclusion. Smartdrill can assist management with any of a variety of decision analysis approaches, depending on the situation. Maximin, maximax and minimax regret decision criteriarules. The goal is to optimize the resulting payoff in terms of a decision criterion. Maximin, maximax and minimax regret decision criteriarules decision makers may use any one of the above criteria to make decisions in the following situations. In decision theory, the pessimistic conservative decision making rule under conditions of uncertainty. Decision maker assumes that the minimum reward occurs for each decision alternative select the maximum of these minimum rewards. Decision analysis formal decision analysis is often used when a decision must be made under conditions of significant uncertainty. Jun 18, 2019 when you make business decisions, you may be guided by optimism, realism or pessimism. Utility a key concept swerve dont swerve swerve 0,0.
Introduction to decision analysis the field of decision analysis provides a framework for making important decisions. Your company is testing a site for drilling for oil. Upper saddle river, nj 07458 introduction decision theory is an analytical and systematic way to tackle problems a good decision. This is the only method of the four that incorporates the probabilities of the states of nature. Risk averse they would choose the maximin decision risk seeking they would choose the maximax decision. Decision analysis is an analytic and systematic approach to studying decision making a good decision is one that is based on. Chapter 3 decision analysis islamic university of gaza. May 26, 2011 introduction to decision analysis the field of decision analysis provides a framework for making important decisions. Decision analysis is used to determine optimum strategies where a decision maker is faced with. From the viewpoint of player 1 the decision maker, this criterion is more. Decision analysis using excel qm state of nature decision. Choose that alternative with the best possible outcome.
Where probabilities are available but the decision maker is not interested in average, longrun values expected values but on actual oneoff outcomes. Every individual has to make some decisions or others regarding his every day activity. Decision makers may use any one of the above criteria to make decisions in the following situations. Alternative criteria for decision making under uncertainty 1. The maximin criterion chooses the best alternative among the worst possibilities. It states that the decision maker should select the course of action whose worst maximum loss is better than the least minimum loss of all other courses of action possible in given circumstances. Similar decision problems naturally arise in parlor games, construction projects, and formation of battle strategies, to name a few. Aug 15, 2017 making decision from payoff table by using maximax, maximin, hurwicz, laplace and emv method. The pessimistic decisionmaker locates the minimum payoff for each possible course of action. A compromise between an optimistic and pessimistic decision a coefficient of realism, is selected by the decision maker to indicate optimism or pessimism about the future 0 decision maker is optimistic. The presence of uncertainty lack of assurance of what is to come gives rise to risk. Decisions under uncertainty using laplace, maximin, minimax, maximax, minimin, hurwicz and savage methods some elements are common for all kinds of decisions. Make maximizing and minimizing decisions using maximin and minimax.
606 513 1276 1585 23 773 1563 1070 946 537 389 839 1292 738 124 1118 1268 765 763 8 477 131 627 374 170 1326 655 119 1198 819 20 1002 10 65 44 1277 1336