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Ranking of M&A Candidates Using TOPSIS Method

The document describes the TOPSIS (Technique for Order Performance by Similarity to Ideal Solution) method for multi-criteria decision making. TOPSIS ranks alternatives based on their distance from the ideal positive solution and farthest from the negative ideal solution. The algorithm involves normalizing a decision matrix, weighting criteria, determining positive and negative ideal solutions, calculating distances from each, and ranking alternatives based on their closeness coefficient values.

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Rajaa Kodad
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110 views

Ranking of M&A Candidates Using TOPSIS Method

The document describes the TOPSIS (Technique for Order Performance by Similarity to Ideal Solution) method for multi-criteria decision making. TOPSIS ranks alternatives based on their distance from the ideal positive solution and farthest from the negative ideal solution. The algorithm involves normalizing a decision matrix, weighting criteria, determining positive and negative ideal solutions, calculating distances from each, and ranking alternatives based on their closeness coefficient values.

Uploaded by

Rajaa Kodad
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Ranking of M&A candidates using TOPSIS method

TOPSIS Method

Technique for Order Performance by Similarity to Ideal Solution TOPSIS is a multi-criteria


decision-making technique based on the minimization of geometric distances that allows the
ordering of compared alternatives in accordance with their distances from the ideal and anti-ideal
solutions. In other words, the most preferred alternative should not only have the shortest distance
from the positive ideal solution (PIS), but also have the farthest distance from the negative ideal
solution (NIS) [2].

To explain the algorithm of TOPSIS, we suppose that we have m alternatives ( A1, A2, . . . , Am ),
and n decision criteria (C 1,C 2, . . . ,C n). Each alternative is evaluated with respect to the n criteria.
All the rating scores assigned to the alternatives with respect to each criteria form a decision
matrix denoted by X =( x ij )mxn .

C 1 … … Cn
A1 x 11 ⋯ x 1n
X =(x ij )mxn = ⋮ ⋮ ⋱
[
A m xm 1 ⋯
⋮
]
x mn
(1)

The algorithm of TOPSIS is as follows:

Step 1: Decision matrix X =(x ij )mxn is normalized according to:

x ij
r ij = (2)
m

√∑
i=1
2
x
ij

where x ij is the rating of i -th alternative for criteria C j .

Step 2: Weighted normalized decision matrix V =( vij )mxnis obtained by multiplying normalized
matrix with the weights of the criteria:

v 11 ⋯ v1 n
V =(vij )mxn= ⋮ ⋱
[
vm1 ⋯ ]
⋮ =r ij × w ij
v mn
(3)

 Index Weight Determining (Entropy weight)

Determining the weight of each index through entropy weight method, and the calculation process
is as follows:
1) Calculating the proportion p} rsub {ij} ¿ of index ij: p} rsub {ij} ¿ is calculated as in (4).

x ij
pij = m (4)
∑ xij
i=1

2) Calculating the entropy e} rsub {j} ¿ of index j: e} rsub {j} ¿ is calculated as in (5).

m
(5)
e j =−k ∑ pij × ln p ij
i=1

The “k” in (5) can be calculated in (6),

k =1/ln m (6)

3) Calculating the entropy weight “w j ” of index j: “w j ” is calculated as in (7).

(1−e j)
w j= n (7)
∑ (1−e j )
j=1

Step 3: Positive ideal solution (PIS) and negative ideal solution (NIS) are determined:

where = max (8)


v+¿ ¿
PIS=¿ j ( v ij )

where −¿¿= min (9)


NIS=¿ vj ( v ij )

Step 4: The distance of each alternative from PIS and NIS are calculated:

n
d +¿¿
i
=
√ ∑ ¿¿¿¿
j=1
(10)

n
d −¿
i
¿=
√∑ j=1
¿¿¿¿
(11)

Step 5: The closeness coefficient of each alternative (CC i ) is calculated:

d−¿ (12)
CC i= ¿ i ¿
d¿ ¿ ¿
Step 6: The ranking of the alternatives is determined according to CC i values: The bigger CC i ,
the better the relevant alternative. In other words, the alternative with the highest closeness
coefficient is determined as the best alternative.

References

[1] C.-H. Yeh, "A problem-based selection of multi-attribute decision -making methods",
International Transactions in Operational Research 9, PP.169-181, 2002.
[2] M. Zeleny, Multiple Criteria Decision Making, McGraw-Hill, New York, 1982.

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