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Decision Analysis Mary Whiteside. Decision Analysis Definitions Actions – alternative choices for a course of action Actions – alternative choices for.

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Presentation on theme: "Decision Analysis Mary Whiteside. Decision Analysis Definitions Actions – alternative choices for a course of action Actions – alternative choices for."— Presentation transcript:

1 Decision Analysis Mary Whiteside

2 Decision Analysis Definitions Actions – alternative choices for a course of action Actions – alternative choices for a course of action Events –possible outcomes of chance happenings Events –possible outcomes of chance happenings Payoffs – a value associated with the result of each event Payoffs – a value associated with the result of each event Decision criteria – rule for selecting an action Decision criteria – rule for selecting an action

3 Payoff Table Event i Market A1 Do not market A2 Success $45.00 $45.00-$3 Failure-$36-$3

4 Decision Tree Market Don’t S F S F $45 -$36 -$3

5 (Opportunity Loss) Event i Market A1 Do not market A2 Success $45.00 $45.00 (45–45) = 0 -$3(45-(-3))=48 Failure-$36(-3-(-36))=33-$3(-3-(-3))=0

6 Criteria for decision making Maximize expected monetary value Maximize expected monetary value Minimize expected monetary opportunity loss Minimize expected monetary opportunity loss Maximize return to risk ratio Maximize return to risk ratio E monetary V/  E monetary V/  Maximize maximum monetary value (maximax) – best best case monetary value Maximize maximum monetary value (maximax) – best best case monetary value Maximize minimum monetary value (maximin) – best worst case monetary value Maximize minimum monetary value (maximin) – best worst case monetary value Minimize maximum opportunity loss (minimax) – best worst case for opportunity loss Minimize maximum opportunity loss (minimax) – best worst case for opportunity loss

7 Criteria for decision making using utility Maximize expected utility Maximize expected utility Minimize expected utility opportunity loss Minimize expected utility opportunity loss Maximize return to risk ratio Maximize return to risk ratio E utility V/  E utility V/ 

8 Expected value of perfect information (EVPI) EVPI = minimum expected opportunity loss EVPI = minimum expected opportunity loss EVPI = expected profit under certainty – expected value of the best alternative EVPI = expected profit under certainty – expected value of the best alternative

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