Decision Making Advanced Organizer Chapter Objectives Explain the

Decision Making

Advanced Organizer

Chapter Objectives Explain the process of management science Be able to solve problems using three types of decision making tools

Relation to Planning Managerial decision making is the process of making a conscious choice between two or more rational alternatives

Types of Decisions Routine and Non-Routine Decisions Objective vs. Bounded Rationality Level of Certainty

Management Science Characteristics Systems view of the problem Team approach Emphasis on use of formal mathematical models and statistical and quantitative techniques

Models & Analysis Formulate the problem Construct a mathematical model Test the model’s ability Derive a solution from the model Apply model’s solution to real system

Categories of Decision Making under Certainty (Only one state of nature exists. ) Decision Making under Risk (Probabilities for states of natures are known. ) Decision Making under Uncertainty (Probabilities for states of natures are unknown. )

Payoff Table N 1 N 2 . . Nj . . Nn Alt. (P 1) (P 2) . . (Pj) . . (Pn) A 1 O 12 . . O 1 j . . O 1 n A 2 O 21 O 22 . . O 2 j . . O 2 n . . . . Ai Oi 1 Oi 2 . . Oij . . Oin . . . . Am Om 1 Om 2 . . Omj . . Omn

Tools for Decision Making under Certainty Linear programming n n n Graphical solution Simplex method Computer software Non-linear programming Engineering Economic Analysis

Linear programming Graphical solution

Linear programming Simplex method BV P S 1 S 2 P P 1 0 0 S 1 Y P 1 0 0 1 X Y 0 0 Coefficient of X Y S 1 -10 -14 0 3 2 1 1 2 0 -3 0 0 2 0 1 1/2 1 0 0 0 3/2 1 0 0 1 1/2 -1/4 RS S 2 0 0 1 7 -1 1/2 11/2 0 120 80 560 40 40 620 -1/2 3/4 20 30 Ratio 60 40 20 80

Linear programming Computer Software Excel: Solver LINDO: www. lindo. com max 10 x + 14 y subject to M) 3 x + 2 y <= 120 A) x + 2 y <= 80 end

Engineering Economic Analysis Time Value of Money Minimum Acceptable Rate of Return Decision Criteria n n Net Present Worth Equivalent Annual Worth Internal Rate of Return Benefit / Cost Ratio

Tools for Decision Making under Risk Expected value Decision trees Decision Node Chance Node http: //www. mindtools. com/dectree. html Queuing theory Simulation

Tools for Decision Making under Uncertainty Laplace criteria (Equally likely) Maximax criteria Maximin criteria Hurwicz criteria Minimax regret crteria

Laplace criteria (Equally likely) N 1 N 2 . . Nj . . Nn Max Alt. (P 1) (P 2) . . (Pj) . . (Pn) A 1 O 12 . . O 1 j . . O 1 n EV 1 A 2 O 21 O 22 . . O 2 j . . O 2 n EV 2 . . . . Ai Oi 1 Oi 2 . . Oij . . Oin EVi . . . . Am Om 1 Om 2 . . Omj . . Omn EVm

Maximax criteria N 1 N 2 . . Nj . . Nn Max. Alt. (P 1) (P 2) . . (Pj) . . (Pn) A 1 O 12 . . O 1 j . . O 1 n MAX 1 A 2 O 21 O 22 . . O 2 j . . O 2 n MAX 2 . . . . Ai Oi 1 Oi 2 . . Oij . . Oin MAXi . . . . Am Om 1 Om 2 . . Omj . . Omn MAXm

Maximin criteria N 1 N 2 . . Nj . . Nn Max. Alt. (P 1) (P 2) . . (Pj) . . (Pn) A 1 O 12 . . O 1 j . . O 1 n MIN 1 A 2 O 21 O 22 . . O 2 j . . O 2 n MIN 2 . . . . Ai Oi 1 Oi 2 . . Oij . . Oin MINi . . . . Am Om 1 Om 2 . . Omj . . Omn MINm

Hurwicz criteria N 1 N 2 . . Nj. . Nn (1 - ) Index Alt. (P 1) (P 2). . (Pj). . (Pn) A 1 O 12. . O 1 j. . O 1 n MAX 1 MIN 1 I 1 A 2 O 21 O 22. . O 2 j. . O 2 n MAX 2 MIN 2 I 2 . . Ai Oi 1 Oi 2 . . Oij. . Oin MAXi MINi Ii . . Am Om 1 Om 2. . Omj. . Omn MAXm MINm Im

Minimax regret crteria First convert payoff table to regret table Alt. A 1 A 2. . Ai. . Am N 1 (P 1) R 11 R 21. . Ri 1. . Rm 1 N 2 (P 2) R 12 R 22. . Ri 2. . Rm 2 . . . . Nj (Pj) R 1 j R 2 j. . Rij. . Rmj . . . . Nn Min. (Pn) R 1 n MAX 1 R 2 n MAX 2. . . . Rin MAXi. . . . Rmn MAXm

Computer-Based Information Systems Decision Support Systems (DSS) A System under the control of 1 or more decision makers, that assists in the activity of decision making by providing an organized set of tools intended to impart structure to portions of the decision-making situation and to improve the ultimate effectiveness of the decision outcome.

DSS Components Data Management System Model Management System Knowledge Engine User Interface DSS User