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Decision Analysis

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Decision Analysis
• Effective decision-making requires that we understand:
• The values, goals, and objectives that are relevant to the decision
problem
• The areas of uncertainty that affect the decision
• The consequences of each possible decision

A Decision-Making Model
Consider the following five-part decision-making model:

Formulate
Identify and Analyze Test Implement
Problem Implement Model Results Solution
Model
Most
important

Unsatisfactory Results

Adapted from Winning Decisions, by Russo and Shoemaker

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Anchoring and Framing

• Errors in judgment arise due to what psychologists term
anchoring and framing

Anchoring
• A seeming trivial factor serves as a starting point
(anchor) for estimations
• Decision makers adjust their estimates but remain too
close to the anchor.

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Framing
• Affects how a decision maker perceives the alternatives in
a decision – often involves a win/loss perspective
• The way the problem is framed influences the choices

Framing Example
• You have been given $1,000 but must choose between the following
alternatives:
a) Receive an additional $500 with certainty or
b) Flip a coin and receive an additional $1,000 if heads or $0 if tails
➔ a) is a sure win and the choice most people prefer
• Now suppose you are given $2,000 and must choose between
a) Give back $500 immediately or
b) Flip a coin and give back $0 if heads or $1,000 if tails
➔ When framed this way, alternative a) is a “sure loss” and many people who
previously preferred alternative a) now opt for alternative b) (because it holds a
chance of avoiding a loss)
• However it is clear that a) alternative guarantees a total payoff of $1,500,
whereas b) offers a 50% chance of a $2,000 total payoff and a 50% chance of
$1,000 total payoff.
• A rational decision maker should focus on the consequences of his/her
choices and consistently select the same alternative, regardless of how the
problem is framed

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A Framing Example
“Careful analysis at a major U.S. steel company showed it
could save hundreds of thousands of dollars per year by
replacing its hot-metal mixing technology, which required that
metal be heated twice, with direct-pouring technology, in
which the metal was only heated once. But the move was
approved only after considerable delay because senior
engineers complained that the analysis did not include the cost
of the hot metal mixers that had been purchased for $3 million
just a few years previously.”

How would you critique this decision?

Adapted from Winning Decisions, by Russo and Shoemaker

Decision Trees and Decision

Tables
• Often our problem solutions require decisions to be made
according to two or more conditions or combinations of
conditions
• Decision trees represent such decision as a sequence of steps
• Decision tables describe all possible combinations of
conditions and the decision appropriate to each combination
• Levels of uncertainty can also be built into decision trees to
account for the relative probabilities of the various outcomes

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Decision Tree Showing Possible

Outcomes Projected
Sales
Results
Outcomes

A.1 Sales Up 10%

Outcome A
A.2 Sales Up 15%

Decision Made
B.1 Sales Up 5%

Outcome B
B.2 Sales Even

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Decision Tree of Outcomes -- Quantifying Uncertainties

Projected
Sales
Results

80%
A.1 Sales Up 10% 32%

Outcome A
40% 20% A.2 Sales Up 15% 8%

Decision Made
70% B.1 Sales Up 5% 42%

60%
Outcome B

30% B.2 Sales Even 18%

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An Example

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Evaluating Your
Start by assigning a cash value or
score to each possible outcome.
Estimate how much you think it
would be worth to you if that
outcome came about.
Next look at each circle
(representing an uncertainty
point) and estimate the
probability of each outcome. If
you use percentages, the total
must come to 100% at each circle.
If you use fractions, these must
add up to 1. If you have data on
past events, you may be able to
make rigorous estimates of the
probabilities. Otherwise write
down your best guess. -

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Calculating Tree Values

• Once you have worked out the value of the
outcomes, and have assessed the probability of the
outcomes of uncertainty, it is time to start
calculating the values that will help you make your
decision.
• Start on the right hand side of the decision tree, and
work back towards the left. As you complete a set of
calculations on a node (decision square or
uncertainty circle), all you need to do is to record
the result. You can ignore all the calculations that
lead to that result from then on. –

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Calculating The Value of

Uncertain Outcome Nodes

Calculating the value of uncertain

outcomes (circles on the
diagram): Multiply the value of
the outcomes by their probability.
The total for that node of the tree
is the total of these values. In the
example in Figure 2, the value for
'new product, thorough
development' is: 0.4 (probability
good outcome) x $1,000,000
(value) = $400,000, 0.4
(probability moderate outcome) x
$50,000 (value) = $20,000, 0.2
(probability poor outcome) x
$2,000 (value) = $400 + $420,400

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Calculating the Value

of Decision Nodes
When evaluating a decision node, write down the
cost of each option along each decision line. Then
subtract the cost from the outcome value that you
have already calculated.
This will give you a value that represents the benefit
of that decision. Note that amounts already spent do
not count for this analysis – these are 'sunk costs' and
(despite emotional counter-arguments) should not be
factored into the decision.
When you have calculated these decision benefits,
choose the option that has the largest benefit, and
take that as the decision made.
This is the value of that decision node.
Figure 4 shows this calculation of decision nodes in
our example:
In this example, the benefit we previously calculated
for 'new product, thorough development' was
$420,400. We estimate the future cost of this
approach as $150,000. This gives a net benefit of
$270,400. The net benefit of 'new product, rapid
development' was $31,400. On this branch we
therefore choose the most valuable option, 'new
product, thorough development', and allocate this
value to the decision node.

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Result

By applying this technique, we

can see that the best option is
to develop a new product. It is
worth much more to us to take
our time and get the product
right, than to rush the product
to market.
However, if we decide to
consolidate, It is better just to
improve our existing products
than to botch a new product

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Example of Using a Decision Tree or

Table to Capture Complex Business
Logic
Consider the following excerpt from an actual business
document:

If the customer account is billed using a fixed rate method, a minimum

monthly charge is assessed for consumption of less than 100 kwh. Otherwise,
apply a schedule A rate structure.
However, if the account is billed using a variable rate method, a schedule A
rate structure will apply to consumption below 100 kwh, with additional
consumption billed according to schedule B.

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Articulating Complex Business Rules

◼ Complex business rules, such as our example, can become
rather confusing
◼ Capturing such rules in text form alone can lead to ambiguity
and misinterpretation
◼ As an alternative, it is often wise to capture such rules in
decision tress or decision tables
◼ The examples on the following slides will illustrate this
technique

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Decision Tree for this Example

< 100 kwh minimum charge
fixed
rate
billing >= 100 kwh schedule A

< 100 kwh schedule A

variable
rate
billing >= 100 kwh
?
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Decision Tree for this Example

< 100 kwh minimum charge
fixed
rate
billing >= 100 kwh schedule A

< 100 kwh schedule A

variable
rate schedule A on
billing first 99 kwh
>= 100 kwh schedule B on
kwh 100 and above

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Decision Table for Example –

Version 1
Is this a
Rules valid
business
Conditions 1 2 3 4 5 case? Did
we miss
Fixed rate act T T F F F something?
Variable rate act F F T T F
Consumption < 100 kwh T F T F
Consumption >= 100 kwh F T F T
Actions
Minimum charge X
Schedule A X X
Schedule A on first 99 kwh, X
Schedule B on kwh 100 +

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Decision Table for Example –

Version 2
Rules
Conditions 1 2 3 4
Account type fixed fixed variable variable
Consumption < 100 >=100 <100 >= 100

Actions
Minimum charge X
Schedule A X X
Schedule A on first 99 kwh, X
Schedule B on kwh 100 +

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Activity
Consider the following description of a company’s matching retirement
contribution plan:

Acme Widgets wants to encourage its employees to save for retirement.

To promote this goal, Acme will match an employee’s contribution to the
approved retirement plan by 50% provided the employee keeps the
money in the retirement plan at least two years. However, the company
limits its matching contributions depending on the employee’s salary and
time of service as follows. Acme will match five, six, or seven percent of
the first $30,000 of an employee's salary if he or she has been with the
company for at least two, five, or ten years respectively. If the employee
has been with the company for at least five years, the company will
match up to four percent of the next $25,000 in salary and three percent
of any excess. Ten-year plus workers get a five percent match from
$30,000 to $55,000. Long-term service employees (fifteen years or
more) get seven percent on the first $30,000 and five percent after that.

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Team Activity (cont’d)

1) Do one of the following tasks according to your instructor’s directions:
a) Create a decision tree that captures the business rules in this
policy.
b) Create a decision table that captures the business rules in this
policy.
2) Did your analysis uncover any questions, ambiguities, or missing
rules?
3) If so, do you think these would be as easy to spot and to analyze
using only the narrative description of this policy?

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Developing a More Complex Decision

Table

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Developing More Complex Decision

Tables
In the 1950's General Electric, the Sutherland
Corporation, and the United States Air Force worked
on a complex file maintenance project, using
flowcharts and traditional narratives, they spent six
labor-years of effort but failed to define the problem.

It was not until 1958, when four analysts using

decision tables, successfully defined the problem in
less than four weeks 1.
_____________________________________
1Taken from “A History of Decision Tables” located at

http://www.catalyst.com/products/logicgem/overview.html

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Steps to create a decision table

1. List all the conditions which determine which action to take.
2. Calculate the number of rules required.
• Multiple the number of values for each condition by each other.
• Example: Condition 1 has 2 values, Condition 2 has 2 values,
Condition 3 has 2 values. Thus 2 X 2 X 2 = 8 rules
3. Fill all combinations in the table.
4. Define the action for each rule
5. Analyze column by column to determine which actions are
appropriate for each rule.
6. Reduce the table by eliminating redundant columns.

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All possible combinations

<cond-1> F T F T F T F T … T

<cond-2> F F T T F F T T … T

Conditions <cond-3> F F F F T T T T … T

… …

<cond-n> F F F F F F F F … T

<action-1> X X X X

<action-2> X X X X

Actions <action-3> X X X X

… …

<action-m> X X X

Actions per combination

(each column represents a different situation)

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Example
• Policy for charging charter flight costumers for certain
in-flight services:2
If the flight is more than half-full and costs more than $350 per
seat, we serve free cocktails unless it is a domestic flight. We
charge for cocktails on all domestic flights; that is, for all the ones
where we serve cocktails. (Cocktails are only served on flights that
are more than half-full.)
_____________________________________
2 Example taken form: Structured Analysis and System Specification, Tom de Marco,

Yourdon inc., New York,

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List all the conditions that

determine which action to take.

Conditions Values
The flight more than half-full? Yes (Y), No (N)

Cost is more than $350? Y, N

Is it a domestic flight? Y, N

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Calculate the space of

combinations

Conditions Number of Possible Combinations/ Rules

Combinations
1 2 Y N
2 4 Y N Y N
Y Y N N
3 8 Y N Y N Y N Y N
Y Y N N Y Y N N
Y Y Y Y N N N N
… …
n 2n

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Calculate the Number of Rules in

Table

• Conditions in the example are 3 and all are two-valued

ones, hence we have:

All combinations are 23 = 8 rules OR

2 X 2 X 2 = 8 rules

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Fill all rules in the table.

POSSIBLE RULES

CONDITONS more than half-full N N N N Y Y Y Y

more than $350 per

N N Y Y N N Y Y
seat

domestic flight N Y N Y N Y N Y
ACTIONS

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Analyze column by column to determine which

actions are appropriate for each combination
POSSIBLE RULES

more than half-full N N N N Y Y Y Y

CONDITONS

more than $350 per seat N N Y Y N N Y Y

domestic flight N Y N Y N Y N Y
ACTIONS

serve cocktails X X X X

free X

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Reduce the table by eliminating

redundant columns.

POSSIBLE COMBINATIONS
more than half-
full
N N N N Y Y Y Y Note that some
columns are identical
CONDITONS

more than $350 except for one condition.

N N Y Y N N Y Y
per seat

domestic flight N Y N Y N Y N Y
ACTIONS

serve cocktails X X X X

free X

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Reduce the table by eliminating

redundant columns.

POSSIBLE RULES
more than half- Note that some
N N N N Y Y Y Y
full columns are identical
except for one condition.
CONDITONS

more than $350

N N Y Y N N Y Y
per seat
Which means that
actions are
domestic flight N Y N Y N Y N Y independent from
the value of that
ACTIONS

serve cocktails X X X X particular condition.

free X

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Reduce the table by eliminating

redundant columns.

POSSIBLE RULES Note that some

more than half- columns are identical
N N N N Y Y Y Y except for one
full
condition.
CONDITONS

more than $350

N N Y Y N N Y Y
per seat
Which means that
actions are
domestic flight N Y N Y N Y N Y independent from
the value of that
ACTIONS

serve cocktails X X X X particular condition.

free X
Hence, the table
can be simplified.

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Reduce the table by eliminating

redundant columns.

POSSIBLE RULES First we combine

more than half- the yellow ones
N N N Y Y Y Y nullifying the condition.
full
CONDITONS

more than $350

N Y Y N N Y Y
per seat

domestic flight - N Y N Y N Y
ACTIONS

serve cocktails X X X X

free X

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Reduce the table by eliminating

redundant columns.

POSSIBLE RULES First we combine the yellow

more than half- ones nullifying the condition.
N N Y Y Y Y
full
Then the red ones.
CONDITONS

more than $350

N Y N N Y Y
per seat

domestic flight - - N Y N Y
ACTIONS

serve cocktails X X X X

free X

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Reduce the table by eliminating

redundant columns.

POSSIBLE RULES First we combine the yellow

more than half- ones nullifying the condition.
N N Y Y Y Y
full
Then the red ones.
CONDITONS

more than $350

N Y N N Y Y
per seat
Notice that yellow and red
columns are identical but by
domestic flight - - N Y N Y one condition.
ACTIONS

serve cocktails X X X X

free X

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Reduce the table by eliminating

redundant columns.

POSSIBLE RULES First we combine the yellow

more than half- ones nullifying the condition.
N Y Y Y Y
full
Then the red ones.
CONDITONS

more than $350

- N N Y Y
per seat
Notice that yellow and red
columns are identical but by one
domestic flight - N Y N Y condition.
ACTIONS

serve cocktails X X X X So, we combine them.

free X

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Reduce the table by eliminating

redundant columns.

POSSIBLE RULES First we combine the yellow

more than half- ones nullifying the condition.
N Y Y Y
full
Then the red ones.
CONDITONS

more than $350

- N Y Y
per seat
Notice that yellow and red
columns are identical but by one
domestic flight - - N Y condition.
ACTIONS

serve cocktails X X X So, we combine them.

free X
Then we combine the violet
colored ones.

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Reduce the table by eliminating

redundant columns.

POSSIBLE RULES Notice that even when we observe that

more than half- the green columns are identical except
N Y Y Y for one condition we do not combine
full
them:
CONDITONS

more than $350

- N Y Y A “NULLIFIED” condition is not the
per seat
same as a valued one.

domestic flight - - N Y

What about this rule? Have we

ACTIONS

serve cocktails X X X
overlooked something?
free X

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Final Solution

Rules

more than half-full N Y Y Y

CONDITONS

more than $350 per seat - N Y Y

domestic flight - - N Y

serve cocktails X X X
ACTIONS

free X

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Complex Decision Table Exercise

A company is trying to maintain a meaningful list of customers. The objective is
to send out only the catalogs from which customers will buy merchandise.
The company realizes that certain loyal customers order from every catalog and
some people on the mailing list never order. These customers are easy to identify.
Deciding which catalogs to send to customers who order from only selected
catalogs is a more difficult decision. Once these decisions have been made by the
marketing department, you as the analyst have been asked to develop a decision
table for the three conditions described below. Each condition has two
alternatives (Y or N):
1. Customer ordered from Fall catalog
2. Customer ordered from Christmas catalog
3. Customer ordered from Specialty catalog

The actions for these conditions, as determined by marketing, are described on

the next slide.

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Complex Decision Table Exercise

Customers who ordered from all three catalogs will get the Christmas and
Special catalogs. Customers who ordered from the Fall and Christmas catalogs
but not the Special catalog will get the Christmas catalog. Customers who
ordered from the Fall catalog and the Special catalog but not the Christmas
catalog will get the Special catalog. Customers who ordered only from the
Fall catalog but no other catalog will get the Christmas catalog. Customers
who ordered from the Christmas and Special catalogs but not the Fall catalog
will get both catalogs. Customers who ordered only from the Christmas
catalog or only from the Special catalog will get only the Christmas or Special
catalogs respectively. Customers who ordered from no catalog will get the
Christmas catalog.
1. Create a simplified decision table (or tree) based on the above decision
logic.

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Solution to Decision Table Exercise

Conditions and Actions 1 2 3 4 5 6 7 8

Order from Fall Catalog Y Y Y Y N N N N

Order from Christmas Catalog Y Y N N Y Y N N
Order from Special Catalog Y N Y N Y N Y N
Mail Christmas Catalog X X X X
Mail Special Catalog X X
Mail Both Catalogs X X

The four gray columns can In addition, Rules 1 & 5 and

be combined into a single Rules 3 & 7 can be combined.
rule. Note that for each, Each pair produces the same
there was NO order placed action and each pair shares two
from the Special Catalog. common conditions.

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Solution to Decision Table

Exercise~ Final Version
Conditions and Actions 1 2 3

Order from Fall Catalog -- -- --

Order from Christmas Catalog Y -- N
Order from Special Catalog Y N Y
Mail Christmas Catalog X
Mail Special Catalog X
Mail Both Catalogs X

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Another Example:
“A marketing company wishes to construct a decision
table to decide how to treat clients according to three
characteristics:
Gender, City Dweller, and age group: A (under 30), B
(between 30 and 60), C (over 60).
The company has four products (W, X, Y and Z) to test
market.
Product W will appeal to female city dwellers.
Product X will appeal to young females.
Product Y will appeal to Male middle aged shoppers who
do not live in cities.
Product Z will appeal to all but older females.”

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The process used to create this decision table is the following:

1. Identify conditions and their alternative values.
There are 3 conditions: gender, city dweller, and age group. Put these into table as 3
rows in upper left side.
Gender’s alternative values are: F and M.
City dweller’s alternative values are: Y and N
Age group’s alternative values are: A, B, and C
2. Compute max. number of rules.
Determine the product of number of alternative values for each condition.
2 x 2 x 3 = 12.
Fill table on upper right side with one column for each unique combination of these
alternative values. Label each column using increasing numbers 1-12 corresponding to
the 12 rules. For example, the first column (rule 1) corresponds to F, Y, and A. Rule 2
corresponds to M, Y, and A. Rule 3 corresponds to F, N, and A. Rule 4 corresponds to M,
N, and A. Rule 5 corresponds to F, Y, and B. Rule 6 corresponds to M, Y, and B and so on.
3. Identify possible actions
Market product W, X, Y, or Z. Put these into table as 4 rows in lower left side.
4. Define each of the actions to take given each rule.
For example, for rule 1 where it is F, Y, and A; we see from the above example scenario
that products W, X, and Z will appeal. Therefore, we put an ‘X’ into the table’s
intersection of column 1 and the rows that correspond to the actions: market product W,
market product X, and market product Z.

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1 2 3 4 5 6 7 8 9 10 11 12
Gender F M F M F M F M F M F M

City Y Y N N Y Y N N Y Y N N
Age A A A A B B B B C C C C
MarketW X X X

MarketX X X

MarketY X

MarketZ X X X X X X X X X X

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5. Verify that the actions given to each rule are correct.

6. Simplify the table.
Determine if there are rules (columns) that represent impossible situations.
If so, remove those columns. There are no impossible situations in this
example.
Determine if there are rules (columns) that have the same actions. If so,
determine if these are rules that are identical except for one condition and
for that one condition, all possible values of this condition are present in the
rules in these columns. In the example scenario, columns 2, 4, 6, 7, 10, and
12 have the same action. Of these columns: 2, 6, and 10 are identical except
for one condition: age group. The gender is M and they are city dwellers. The
age group is A for rule 2, B for rule 6, and C for rule 10. Therefore, all possible
values of condition ‘age group’ are present. For rules 2, 6, and 10; the age
group is a “don’t care”. These 3 columns can be collapsed into one column
and a hyphen is put into the age group location to signify that we don’t care
what the value of the age group is, we will treat all male city dwellers the
same: market product Z.

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Final Decision Table

1 2 3 4 5 6 7 8 9 10
Gender F M F M F M F M F M

City Y Y N N Y N N Y N N
Age A A A B B B C C C
MarketW X X X

MarketX X X

MarketY X

MarketZ X X X X X X X X

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Thank you
for your
attentions!

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