QTB 1

Presentation.. SUBMITTED by.
Group members,
Sana KOUSAR s1f18mcom0009
WARDA SHEIKH S1F18MCOMOO16
ARSLAN TANVEER S1F18MCOM0013
WASEEM S1F18MCOM0017
Presented TO:
MAM AMNA
Presentation topic
Decision analysis
 Introduction
 The six steps in decision making
 Types of decision making environment
 Decision making under uncertainty
 Decision making under risk
 Decision trees
 conclusion
 Quantitative techniques are those statistical and
programming techniques, which help decision makers
solve many problems, especially those concerning
business and industry.
 Definition
A choice made between alternative courses
of action in a situation of uncertainty.
 Sometimes in the midst of last century, Chester Barnard, a
retired telephone executive and the author of the functions
of the Executive, imported the term “decision making” from
the Lexicon of public administration in to the business
world. Decision making within an organization is only one
ripple in a stream of thought flowing back to a time when
man, facing uncertainty, sought guidance from the stars.
 Decision theory is an analytic and systematic approach
to the study of decision making.
 A good decision is one that is based on logic, considers
all available data and possible alternatives, and the
quantitative approach described here.
 Clearly define the problem
 List the possible alternatives
 Identify the possible outcomes or states of nature
 List the payoff of each combination of each alternatives
and outcomes
 Select one of the mathematical decision theory models
 Apply the model and make your decision
 Define the problem.
The company is considering expanding by
manufacturing and marketing a new product.
 list alternatives
 construct a large new plant
 construct a small new plant
 do not develop the new product line at all.
 Identify possible outcomes
The market could be favorable or unfavorable.
 List the payoffs
Identify conditional values for the profits for large
plant, small plant and no development for the two
possible market conditions.
 Select decision model
this depends on the environment and amount of risk
and uncertainty.
 apply the model to the data
solution and analysis are then used to aid in decision
making.
 Decision making under certainty
The outcome of a decision alternative is
known(there is only one state of nature.)
 Decision making under risk
The outcome of a decision alternative is
not known, but its probability is known.
 Decision making under uncertainty
the outcome of a decision alternative
is not known and even its probability in not known.
 Optimistic(maximax)
 Pessimistic(maximin)
 Criterion of realism
 Equally likely(laplace)
 Minimax ragret
 An adventurous and aggressive decision maker may
choose the act that would result in the maximum payoff
possible.
Step 1 - pick maximum payoff each alternative .
Step 2 -Pick maximum of those minimum in step 1; its
corresponding alternative is the decision.
This is viewed as an optimistic approach, Best of bests.
Alternatives State of nature
Favorable unfavorable
market market
$ $
Construct a large plant 200,000 -180,000
Construct a small plant 100,000 -20,000
Do nothing 0 0
This is also called waldian criterion .This criterion of
decision making stands for choice between alternative
courses of assuming pessimistic view of nature.
Step 1 - Pick minimum payoff of each alternative.
Step 2 - Pick the maximum of those minimums in step 1,
its corresponding alternative is the decision.
This is viewed as a pessimistic approach , best of worsts.
Alternatives State of nature Minimum in
Favorable Unfavorable rows
Market Market
$ $
Construct a large 200,000 -180,000 -180,000

plant
Construct a small 100,000 -20,000 -20,000

plant
Do nothing 0 0 0
This method is a combination of maximin and maximax criterion
.Also known as criterion of rationality . Neither too optimistic nor
too pessimistic .
 Step 1 - calculate hurwicz value for each alternative.
 Step 2 – Pick the alternative of largest hurwicz value as the
decision .
 Hurwicz value of an alternative = (row max ) (alpha) + (row min) (
1-alpha)
State of nature Weighted average
Alternatives
Favorable Unfavorable (0.08)
Market Market ∞max.+∞mini.(1-
$ $ ∞)min.
Construct a large 200,000 -180,000 1024,00

plant
Construct a small 100,000 -20,000 76,000

plant
Do nothing 0 0 0
This decision maker makes a simple assumption that each
state of nature is equally likely occur & average payoff
for each . Choose decision with highest average payoff
Also known as laplace criterion
Step 1 - calculate the average payoff for each alternative .
Step 2 – The alternative with highest average if the
decision .
Alternatives State of nature Row average
Favorable Unfavorable $
Market Market
$ $
Construct a large 200,000 -180,000 10,000
plant
Construct a small 100,000 -20,000 40,000

plant
Do nothing 0 0 0
Application of the minimax criterion requires a table of losses or table of
regret instead of gains .
Regret is amount you give up due to not picking the best alternative in a given
state of nature .
Regret = opportunity cost = opportunity loss

Step 1 - construct a regret table .
Step 2 - pick maximum regret of each row in regret table .
Step 3 – Pick minimum of those maximums in step 2 , its corresponding

alternative is the decision .
Expected monitory
value Expected opportunity
(EMV) loss
(EOL)
Activities State of nature
cold warm
Weather Weather
$ $
Sell cold drinks 60-40 90-90
Sell ice creams 60-60 90-40

EOL
Cold warm
Weather Weather
$ $
Sell cold drinks 20 0 06
Sell ice cream 0 50 35
probabilities 0.3 0.7

 Sell cold drinks:
0.3(20)+0.7(0)=6
 Cell ice cream:
0.3(0)+0.7(50)=35
so, activity sell cold drinks is selected=06
because it gives us minimum payoff.
EMV
Cold Warm
Weather Weather
$ $
Sell cold drinks 40 90 75
Sell ice cream 60 40 46
probabilities 0.3 0.7

 Sell cold drinks:
0.3(40)+0.7(90)=75
 Sell ice cream:
0.3(60)+0.7(40)=46
so, activity sell cold drinks is selected=75
because it gives us maximum payoff.
 A decision tree is a diagram that illustrate the correct
ordering of actions and events in a decision analysis
problem. Each act or event is represented by a node on
the decision tree.
Decision nodes
Chance node
End nodes
 Are simple to understand and interpret
 Have value even with little hard data
 Use a white box model
 Can be combined with other decision techniques
 Decision analysis is an aptitude which reflects your
attitude which determines your altitude.
 Consistently great decisions are the building blocks for
growth and development for a better life and a better
world or future.
 Practice makes perfect.

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Construct a small plant 100,000 -20,000

Construct a large 200,000 -180,000 -180,000

Construct a small 100,000 -20,000 -20,000

Construct a large 200,000 -180,000 1024,00

Construct a small 100,000 -20,000 76,000

Construct a small 100,000 -20,000 40,000

Regret = opportunity cost = opportunity loss

Step 3 – Pick minimum of those maximums in step 2 , its corresponding

Sell cold drinks 60-40 90-90

Sell ice creams 60-60 90-40

Sell cold drinks 20 0 06

Sell ice cream 0 50 35

probabilities 0.3 0.7

Sell cold drinks 40 90 75

Sell ice cream 60 40 46

probabilities 0.3 0.7

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