Introduction to Decision Making

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Chapter 1

• Introduction to Decision Making

2
Decision Analysis

• Science?
• prescriptive approach designed for normally
  intelligent people who want to think hard and
  systematically about some important real
  problems. - Keeney and Raiffa, 1976
• Emotion?
• when should we trust our instincts, and when
  should we be wary of them?that our snap
  judgments and first impressions can be educated
  and controlled." - Malcolm Gladwell, 2005

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Decision Making

• What makes decisions difficult?
• What is a good decision?

4
Decision Making

• What makes decisions difficult?
• Uncertainty
• Lack of control
• Complexity
• Trade-offs
• What else????

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Decision Making

• What makes a good decision?
• Achieves goal
• Makes money
• Does not reduce utility
• Minimizes risk
• What else????

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Decision Making Elements

• Values Objectives
• Whats important to you?
• What do you want to achieve?
• Decision Context
• Uncertain Events
• States of Nature
• Consequences
• Payoffs

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Decision Making

• Good decision / good outcome
• Good decision / unlucky outcome
• Bad decision / lucky outcome
• Bad decision / bad outcome

Rainy day Take umbrella Rains, stay dry.
Sunny day Dont take umbrella Rains, get wet.
Rainy day dont take umbrella No rain, stay dry.
Rainy day Dont take umbrella Rains, get wet.
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Decision Making Studying!
Outcome
Good
Bad
Decision is
Good
Bad
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Components of Decision Models
Defined by probability distributions
Exogeneous
Variables to make decision about
Performance variables
Decision Variables
MODEL set of relationships
Endogeneous
Policies/ Constraints
Rules, restrictions, what-ifs
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Decision Analysis Process
Identify the problem
Structuring the problem
Identify objectives, criteria and alternatives

• Decompose and model the problem
• Qualitative Considerations
• Quantitative Considerations

Analyzing the problem
Choose the best alternative
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Decision Analysis Process Contd
Choose the best alternative
Sensitivity Analysis
Is further analysis needed?
Problem Solving encompasses all of the above
and these steps
YES
NO
Implement the chosen alternative
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Types of Decision Models
Conditions
Certainty
Risk/Uncertainty
Decision is
Case study Breakeven analysis
Decision analysis,
Simple
Utility theory
Goal Prog AHP
Markov analysis
Complex
Utility theory
Dynamic Prog
Probabilistic
Dynamic Prog.
Simulation
Dynamic
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Student Introductions
Decisions Youve Made?
14
For Next Class

• Begin reading Chapter 14
• Do HW 2 3