TLO 6: Illustrate the algorithm for solving simple applications of dynamic programming and

goal programming

MODULE 7

MULTICRITERIA DECISION-MAKING: GOAL PROGRAMMING

To introduce the topic of multicriteria decision making, we consider a technique

In Goal Programming, aside from a general Objective Function, there are other
goals that are specified either about the profit, or use of some resources. In this
case, there are additional goals that are ranked in order of priority, and these
additional goals become part of the constraints.

The method of formulating a Goal Programming mode follows the approach of Linear
Programming, and the graphical solution will be used to illustrate the solving
process.

We now summarize the procedure used to develop a goal programming model.

Step 1. Identify the goals and any constraints that reflect resource capacities or
other restrictions that may prevent achievement of the goals.

Step 2. Determine the priority level of each goal; goals with priority level P1 are
most important, those with priority level P2 are next most important, and so on.

Step 3. Define the decision variables.

Step 4. Formulate the constraints in the usual linear programming fashion.

Step 5. For each goal, develop a goal equation, with the right-hand side specifying
the target value for the goal. Deviation variables are included in each goal equation
to reflect the possible deviations above or below the target value.

Step 6. Write the objective function in terms of minimizing a prioritized function of

Note: The constraints in the general goal programming model are of two types: goal
equations and ordinary linear programming constraints. Some analysts call the goal
equations goal constraints and the ordinary linear programming constraints, system
constraints.

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An illustrative GP Problem:

GOAL PROGRAMMING: FORMULATION AND GRAPHICAL SOLUTION

To illustrate the goal programming approach to multicriteria decision problems, let

U.S. Oil, which has a return of $3 on a $25 share price, provides an annual rate of
return of 12%, whereas Hub Properties provides an annual rate of return of 10%.
The risk index per share, 0.50 for U.S. Oil and 0.25 for Hub Properties, is a rating
Nicolo assigned to measure the relative risk of the two investments. Higher risk
index values imply greater risk; hence, Nicolo judged U.S. Oil to be the riskier
investment. By specifying a maximum portfolio risk index, Nicolo will avoid placing
too much of the portfolio in high-risk investments.

However, the client agreed that an acceptable level of risk would correspond to
portfolios with a maximum total risk index of 700. Thus, considering only risk, one
goal is to find a portfolio with a risk index of 700 or less.

Another goal of the client is to obtain an annual return of at least $9000.

Thus, the portfolio selection problem is a multicriteria decision problem involving two
conflicting goals: one dealing with risk and one dealing with annual return. The goal
programming approach was developed precisely for this kind of problem. Goal
programming can be used to identify a portfolio that comes closest to achieving both
goals. Before applying the methodology, the client must determine which, if either,
goal is more important.

Suppose that the client’s top-priority goal is to restrict the risk; that is, keeping the
portfolio risk index at 700 or less is so important that the client is not willing to trade
the achievement of this goal for any amount of an increase in annual return. As long
as the portfolio risk index does not exceed 700, the client seeks the best possible
return. Based on this statement of priorities, the goals for the problem are as follows:

Primary Goal (Priority Level 1) Goal 1: Find a portfolio that has a risk index of 700 or
less.

Secondary Goal (Priority Level 2) Goal 2: Find a portfolio that will provide an annual
return of at least $9000.

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In goal programming terminology, they are called preemptive priorities because
the decision maker is not willing to sacrifice any amount of achievement of the priority
level 1 goal for the lower priority goal. The portfolio risk index of 700 is the target
value for the priority level 1 (primary) goal, and the annual return of $9000 is the
target value for the priority level 2 (secondary) goal. The difficulty in finding a solution
that will achieve these goals is that only $80,000 is available for investment.

Developing the Constraints and the Goal Equations

We begin by defining the decision variables:

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Part 1 of solution: Graphical solution for Priority level 1 goal

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The optimal solution point is the intersection of the Priority Level 1 goal equation and
the Available funds:

0.5𝑈 + 0.25𝐻 = 700

Solving these two equations simultaneously, we arrive at:

𝐻 = 1,200 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑓 𝐻𝑢𝑏 𝑝𝑟𝑜𝑝𝑒𝑟𝑡𝑖𝑒𝑠

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MODULE 7 ACTIVITY:

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