Decision Analysis
Dr. Saeed Shiry
Amirkabir University of Technology
Computer Engineering & Information Technology Department
Definitions
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A decision is a choice between alternatives based
on estimates of the values of those alternatives.
Supporting a decision means helping people
working alone or in a group gather intelligence,
generate alternatives and make choices
Supporting the choice making process involves
supporting the estimation, the evaluation and/or the
comparison of alternatives
Human decision-making
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H. A. Simon is considered a pioneer in the
development of human decision-making models. His
basic model depicts human decision-making as a
three-stage process. These stages are:
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Intelligence: The identification of a problem (or
opportunity) that requires a decision and the collection of
information relevant to the decision
Design: Creating, developing, and analyzing alternative
courses of action
Choice: Selecting a course of action from those available.
Decision-Making Phases and
Steps
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Intelligence
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Design
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Data Gathering
Observation of reality and collecting of any relevant qualitative and quantitative data is
done for the general situation of interest.
Problem Recognition
Based on the interpretation of collected data, a well focused problem statement and
general objective is defined.
Model Formulation
Using the well-focused problem, a predefined model is instanced with a set of courses
of action, outcomes criteria, set of uncontrolled events and parameters, and the
relationships between these variables. If a predefined model is unavailable, a new
model must be developed.
Model Analysis
Face validity and pilot test of the model is conducted to reduce any potential source of
significant error.
Choice
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Generation & Evaluation
With a validated model, all courses of action are evaluated (or dynamically generated)
and what-if, sensitivity, and goal-seeking analysis are conducted, in terms of the
outcomes criteria.
Selection
Best course of action is finally suggested, using an optimization, satisfaction criteria, or
other approach.
Elements for rational decision
making
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Elements for rational decision making
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Identify the goal to be achieved by the decision
Identify the options available to the decision maker
Evaluate the likely outcomes if each option is chosen
Decide which option is best
… And then Do it!
Decision makers need support with all elements
Why are decisions hard?
Because of its complexity; uncertainty
surrounding the subject, to think about
interests of various groups, Having limited
information:
1.
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it needs a structure to keep the problem to be
analyzed: decision tree and influence diagram.
Why are decisions hard?
2.
3.
4.
Because of inherent uncertainty: example:
introducing a new product to the market.
A decision maker may work toward multiple
objective but progress in one direction. A
trade off between benefit in one area
against cost in other areas.
Different perspectives may lead to different
conclusions. More than one person is
involved in decision making.
What is a good decision?
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A simple answer: it is the one that gives the
best outcome.
You may make a decision after careful
consideration of the available information and
through deliberation about the goals and
possible outcomes, however still have an
unlucky outcome: such as stock market.
DSS helps you make a decision with eyes open! You can do
better with structure and guidance
Decision Analysis
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Decision Analysis providers structure and
guidance for thinking systematically about
hard decisions.
To help a decision maker take action with
confidence gained through a clear
understanding of the problem.
Subjective judgment
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While management science and operational
research ignore subjective judgment,
decision analysis approach include it.
Decision Analysis Process
1.
2.
3.
4.
5.
6.
7.
Identify the decision situation (find the exact
problem): minimizing cost? Maximizing profit?
Minimizing risks?
Identify alternatives
Decompose and model the problem: model of
problem structure, Model of uncertainty, Model of
preference.
Choose the best alternative
Sensitivity analysis
Is further analysis needed? If YES repeat step 1,2
and 3
Implement the chosen alternative
Decision Process
Decision Analysis
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Once a decision making problem is
understood and defined it is time to analyze
it.
You might wonder if the decisions you make
are suitable for decision analysis. If you are
looking for a way to structure your decisions
to make them more organized and easier to
explain to others, you definitely should
consider using formal decision analysis.
Influence Diagrams
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Influence diagrams present a decision in a simple,
graphical form.
Decisions, chance events and payoffs (values) are
drawn as shapes (called nodes) and are connected
by arrows (called arcs) which define their
relationship to each other.
In this way, a complex decision may be reduced to a
few shapes and lines.
Influence diagrams are excellent for showing the
relationship between events and the general
structure of a decision clearly and concisely.
Influence Diagrams
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The term influence refers to the dependency
of a variable on the level of another variable.
Rectangle: Decision Variable
Circle: uncontrollable or intermediate variable
Oval: result (outcome) variable, intermediate or final
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The variables are connected by arrows which
indicate the direction of influence.
Influence Diagrams
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The shape of arrow indicate the type of
relationship:
Interest
Amount
Certainty
Collected
In CDs
Uncertainty
Price
Sales
~
Demand
Random (Risk variable)
Sales
Dereference (between outcome variables):
A double lined arrow
Example
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Consider the following profit
model:
Profit = income – expenses
Income = unit sold x unit price
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Unit Sold = 0.5 x amount used in
advertisement
Expenses = unit cost x units sold
+ fixed cost
Unit
Price
~
amount used
in
advertisement
Income
Units
Sold
Profit
Units
Cost
Fixed
Cost
Expenses
Example: An Influence
Diagram for the Profit Model
Unit Price
~
Amount used in advertisement
Income
Units Sold
Profit
Expense
Unit Cost
Fixed Cost
Decision Trees
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Decision trees are a comprehensive tool for
modeling all possible decision options.
While influence diagrams produce a
compact summary of a problem, decision
trees can show the problem in greater detail.
Decision trees describe events in
chronological order but can be much larger
than influence diagrams.
Decision Trees
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It utilizes a network of two types of nodes: decision
(choice) nodes, and states of nature (chance) nodes
Square represents decisions to be made.
Circles represents chance events. Chance nodes,
are random variables and they represent uncertain
quantities that are relevant to the decision problem.
Branches from a square correspond to the choices
available to the decision maker.
Branches from a circle represent the possible
outcome of a chance event.
The consequence is specified at the ends of the
branches.
Example
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Venture capitalist's situation in decision
weather to invest in a new business.
Objective: to make money.
Venture Succeeds
Invest
Venture Fails
Do not Invest
Large Return On Investment
Funds Lost
Typical Return Earned on Less
Risky Investment
Interpretation of Decision
Trees
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The options represented by branches from a
decision node must be such that the decision maker
can choose only one option.
Each chance node must have branches that
correspond to a set of mutually exclusive and
collectively exclusive outcomes ( only one of them
can happen, No other possibilities exit)
A Decision Tree must show all the possible paths
that the decision maker might follow through time.
Including all possible decision alternatives.
Some times the nodes might occur in a time
sequence.
The sequence of decisions is shown in the tree from
left to right.
Modeling Decisions
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Given a complicated problem, how should we
begin?
A critical first step is to identify elements of
the situation:
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Values and Objectives,
Decisions to make,
Uncertain events,
Consequences
Values and Objectives
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Values refer to the thing that matter to you.
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What is value for a farmer?
What is values for a scientist?
Objective is a specific thing that you want to achieve.
An individual’s objective taken together make up his or
her values.
A persons values are the reason for making decisions.
Every decision situation involves a specific context and
that context determines what objectives need to be
considered.
A requisite decision model includes all of the objectives
that matter within the decision context at hand.
Money Making: A special
Objective
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Money Making is an important objective because it
allows us to do thing that we want to do: eat, afford
housing and clothing, travel, live comfortably,…
For corporations money is a primary objective.
However many situations may require a trade-off
between making money and some other objective.
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Example: Consider a hospital that performs organ
transform. Wealthy people can pay more to move up in the
queue. Hospital can use this extra money to buy new
equipments to help needy people. But moving wealthy
patient may have risks to the lives of other people. In this
case hospital will probably think to forget the wealthy
people money.
Example: Selecting a
Supercomputer for a Company
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Objectives:
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Minimize Cost: Five year Cost, Cost of improved
performance.
Maximize performance: Speed, Throughput, Memory size,
Disk Size, On site performance,
Satisfy User needs: Installation date, Ease of use, Software
compatibility, Mean time between failure.
Satisfy organizational needs: Square footage, Water
cooling, Operator Tools, Telecommunications, Vendor
support.
Satisfy Management issues: Vendor Health, Commitment
to supercomputer.
Decisions to Make
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Identifying the immediate decision to make is a
critical step in understanding difficult decision
situation.
Sequential decisions
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In many cases there is no single decision to make, but
several sequential decisions.
Example: A manufacture may decide weather or not to
introduce a product, then whether to produce it or
subcontract it, then where to market it ,…
Dynamic Decisions: A decision in future may depend
on sequences of decisions taken already.
Uncertain Events
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Many important events has to be taken without
knowing exactly what will happen in the future.
It is important to know at each decision exactly what
information is available and what remains unknown.
The possible things that can happen in the
resolution of uncertain events are called outcomes.
Many different uncertain events might be considered
in a decision situation but only some are relevant!
Consequences
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After the last decision has been made and
the last uncertain event has been resolved,
the decision maker’s fate is finally
determined.
It may be a matter of profit or loss.
How far in the horizon should we consider?
Homework 2
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A) Study the concept of Time Value of Money and make a report on
it.
Analyze the decision situation weather to invest in Bank Parisan
(19% investment rate) or purchase a house?
B) Papers From: Encyclopedia of Decision Making and Decision
Support Technologies
Read and write a summary for 2 papers out of following:
1.
2.
3.
The Analytic Hierarchy Process: Structuring, Measurement,
and Synthesis
Context in Decision Support Systems Development
Contextualization in Decision Making and Decision Support
The Summary should be written in Persian.
Hand over it to Papers TA by next week.
Homework 3
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1.
2.
3.
A) Solve the question handed in paper.
B) Papers From: Encyclopedia of Decision Making and Decision
Support Technologies
Read and write a summary for 1 papers out of following:
Diagrammatic Decision-Support Modeling Tools in the Context of
Supply Chain Management
Fuzzy Decision Trees
Influence Diagrams as a Tool for Decision Support System Design
The Summary should be written in Persian.
Hand over it to Papers TA by next week.