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Unit 2: Decision Theory

Operation Management

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68 views

Unit 2: Decision Theory

Operation Management

Uploaded by

Angelica Mae Cavalida
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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5s-1 Decision Theory

Unit 2

Decision Theory

Operations Management, Eighth Edition, by William J. Stevenson


McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
5s-2 Decision Theory

Decision Theory

Decision Theory represents a general


approach to decision making which is suitable for a
wide range of operations management decisions,
including:
Capacity product
product and
and
planning service
service design
design

location equipment
planning selection
5s-3 Decision Theory

Decision Theory Elements


· A set of possible future conditions exists that
will have a bearing on the results of the
decision
· A listof alternatives for the manager to
choose from
· A known payoff for each alternative under
each possible future condition
5s-4 Decision Theory

Decision Theory Process


· Identify possible future conditions called
states of nature
· Develop a list of possible alternatives, one
of which may be to do nothing
· Determine the payoff associated with each
alternative for every future condition
5s-5 Decision Theory

Decision Theory Process (Cont’d)


· If possible, determine the likelihood of each
possible future condition
· Evaluate alternatives according to some
decision criterion and select the best
alternative
5s-6 Decision Theory

Causes of Poor Decisions

Bounded Rationality
The limitations on decision
making caused by costs,
human abilities, time, technology,
and availability of information
5s-7 Decision Theory

Causes of Poor Decisions (Cont’d)

Suboptimization
The result of different
departments each
attempting to reach a
solution that is
optimum for that
department
5s-8 Decision Theory

Decision Environments
· Certainty - Environment in which
relevant parameters have known
values
· Risk - Environment in which certain
future events have probable
outcomes
· Uncertainty - Environment in which
it is impossible to assess the
likelihood of various future events
5s-9 Decision Theory

Decision Making under Uncertainty

Maximax - Choose the alternative with


the best possible payoff
Maximin - Choose the alternative with
the best of the worst possible payoffs
Minimax Regret - Choose the alternative
that has the least of the worst regrets
Laplace - Choose the alternative with the
best average payoff of any of the
alternatives
5s-10 Decision Theory
5s-11 Decision Theory
5s-12 Decision Theory
5s-13 Decision Theory
5s-14 Decision Theory
5s-15 Decision Theory
5s-16 Decision Theory

Laplace – Choose the alternative with the best


average pay-off of any of the alternatives.

Alternatives Low Moderate High


Small Facility $10 $10 $10
Medium $7 $10 $12
Facility
Large Facility (4) $2 $16

SF = (10+10+10)/3 = $10
MF= (7+10+12)/3 = $10.33
FL= (-4+2+16)3= $4.67
Therefore, the best average pay-off is to build a MF.
5s-17 Decision Theory

Expected Value of Perfect Information

Expected value of perfect information: the


difference between the expected payoff under
certainty and the expected payoff under risk

Expected value of Expected payoff - Expected payoff


perfect information = under certainty under risk
5s-18 Decision Theory
5s-19 Decision Theory
5s-20 Decision Theory
5s-21 Decision Theory
5s-22 Decision Theory
5s-23 Decision Theory
5s-24 Decision Theory

Format of a Decision Tree


Figure 5S.1

a t ure 1 Payoff 1
of n
Decision Point State
Chance Event oo se A’ 1 Payoff 2
Ch
A’ State
se o f natu 2
o o re 2
Ch Choose
A’2 Payoff 3
B
1
h oo se A’ 3 Payoff 4
1 C
n a t u re
Ch

o f 2
S t at e
oo
se

Choose Payoff 5
A’4
A’ 2

State
of natur Payoff 6
e 2
5s-25 Decision Theory

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