EMBA – Decision Analysis
Agenda
1. Interfaces
Gawne, Aron
Kirby, Mary
Rutberg,
Matthew
Ananturi, Siv
PLATO Helps Athens Win Gold: Olympic Games Knowledge Modeling for Organizational
Change and Resource Management
Research and Development Project Valuation and Licensing Negotiations at
Phytopharm, PLC
Pricing Analysis for Merrill Lynch Integrated Choice
A Multimethod Approach for Creating New Business Models: The General Motors
OnStar Project
2. Bidding
a. Dom’s $20 game
b. Howard’s $20 game
3. Homework review
a. Transportation & Assignment
b. Integer Programming
4. Decision Tables and results (Example 1)
a. Expected Monetary Value (EMV) or Expected Value or Expected Profits
b. Maximin (ignores probabilities)
c. Maximax (ignores probabilities)
d. Hurwicz α*best + (1-α)* worst (ignores probabilities)
e. Regret
i. Minimax regret
ii. Minimum average regret
f. Value of Perfect Information
g. LaPlace (equal probabilities)
h. Excel – Scenarios
5. Creating the decision table (Example 2)
a. By hand (whiteboard)
b. Excel QM
6. Decision tables as a decision tree
a. Example 1 revisited - introducing Excel QM Decision Tree model
7. Decision trees (sequential)
a. Example 3 – job hunting
i. By hand
ii. Excel QM
iii. Example 3b
b. Example 4 – investment
8. Note: “Optimal Sequential Decisions and the Content of the Fourth-and-Goal Conference
by Hurley; Interfaces 28:6 Nov-Dec 1998 (pp19-22)
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9. Excel Data Tables (time permitting)
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Exercise 1: A decision table example.
A company is considering modifying its capacity. There are four options available.
1. Overtime – this is very flexible but there is a limit to the amount of capacity which can be
added
2. Subcontract – this is also flexible and limited
3. Hire part-timers – we can not hire and fire every day so this is not as flexible as either of
the two previous options but allows us to add more capacity than just using overtime or
subcontracting
4. Hire full timers – this is the least flexible but enables us to add the most capacity
The future is uncertain. We are not sure if demand will be low, medium or high. The profits
depend on the demand and our decision and are given in the table below.
Alternative\Probability
Overtime
Subcontract
Hire part time
Hire full time
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Low
demand
0.2
5
3
-1
-7
Normal
demand
0.5
7
6
9
10
High
demand
0.3
10
12
14
15
Solution using Excel QM (or QM for Windows)
Decision Tables
Data
Profit
Probability
Decrease
0.2
Overtime
Subcontract
Hire part time
Hire full time
Same
5
3
-1
-7
0.5
Increase
0.3
7
6
9
10
10
12
14
15
Results
EMV
Maximum
Expected Value of Perfect Information
Column best
5
10
7.5
7.2
8.5
8.1
8.5
15
10.5
8.5
2
Increase
0.3
Expected
0.5
3
4
1
0
5
3
1
0
3
3.3
2
2.4
2
Minimum
5
3
-1
-7
5
Decrease
0.2
Overtime
Subcontract
Hire part time
Hire full time
0
2
6
12
Same
Minimum
Decision making rules





Expected (monetary) value
Maximum of the minima (maximin)/Worst case scenario analysis
Maximum of the maxima (maximax)/Best Case analysis
o Sports discussion
Minimum of the maxima regrets (minimax regret)
(Expected regret)
Concept
 Expected value of perfect information
Excel Scenarios
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10
12
14
15
15
<-Expected value under certainty
<-Best expected value
<-Expected value of perfect information
Regret
Probability
Maximum
Maximum
5
4
6
12
4
Example 2: Creating the decision table.
In August, a bookstore must decide how many of next year's nature calendars to order. Each
calendar costs the bookstore $6.00 and is sold for $10.00. After February 1, all unsold calendars
are returned to the publisher for a refund of $.50 per calendar. Based on past years the number of
calendars that will be sold is distributed as follows:
Number
Sold
100
150
200
250
300
Probability
.3
.2
.3
.15
.05
Create the decision table by hand
Profit
Order 100
Order 100
Order 150
Order 200
Order 250
Order 150
Order 200
Order 250
Order 300
Create the decision table using Excel QM – Single Period Inventory
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Order 300
Decision Trees
Create the decision table from example 1 as a decision tree using Excel QM
Example 3: Sequential decision tree – job hunting
Maurice Cheeks is currently employed at a salary of $100,000 but is unhappy with his job. While
Maurice is unhappy due to lack of support from his manager his major concern is with salary.
Maurice has taken two immediate actions in order to try and alleviate the problem. He has
applied for a job with another firm (at a salary of $120,000) and he has applied for a new position
in his current firm (at a salary of $140,000). As life has it, Maurice has been offered the new job
with the new firm and has 10 days to decide whether or not to take the offer. Unfortunately, he
will not find out about the internal transfer for at least a month. Maurice feels that if he stays with
his current firm there is a 70% chance that he will get the new position. If he does not get the new
position then he can, of course, continue in his current position or he is considering quitting his
current job on principle in order that he may devote full time to searching for a new job (after a
brief vacation in Europe). If he looks for a new job then he figures there is a 20% chance he will
land a job with a salary of $130,000; a 40% chance that he will land a job with a salary of
$110,000, a 30% chance that he will land a job with a salary of $90,000 and a 10% chance that
he will not land a job and therefore have to perform menial labor earning $40,000. Should
Maurice take the job offer in hand or not?
Create the decision tree using Excel QM
Example 3b: Suppose the job search costs $5,000.
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Example 4: Sequential decision tree – investment
An investor is deciding between purchasing an apartment building for $800,000 or purchasing
land for $200,000.
If the investor purchases the apartment building, either the population of the town will grow over
the next 10 years (p=.6) and the (NPV) revenue will be $2,000,000 or the population will not
grow over the next 10 years (p=.4) and the (NPV) revenue will be $225,000. Payoffs are over a
10 year period.
If the investor chooses to purchase land, there is a 50% probability that there will be population
growth over the next 3 years at which time a decision will need to be made about the
development of the land.
If there has been population growth the investor will consider building apartments costing
$800,000 or selling the land for $450,000.
If there has not been population growth the investor will consider developing the property
commercially costing $600,000 or selling the land for $210,000. (Notice the land sells for less if
there has been no growth rather than if there has been growth.)
If the apartments are built and if there is population growth over the next 7 years (p=.8) then the
(NPV) revenue will be $3,000,000. If the apartments are built and if there is no population
growth over the next 7 years (p=.2) then the (NPV) revenue will be $700,000.
If the land is developed commercially and if there is population growth over the next 7 years
(p=.3) then the (NPV) revenue will be $2,300,000. If the land is developed commercially and if
there is no population growth over the next 7 years (p=.7) then the (NPV) revenue will be
$1,000,000.
(Notice that the probabilities of growth over the last 7 years differ because in one case there was
growth in the first 3 years while in the other case there was no growth in the first 3 years.)
Create the decision tree using Excel QM
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Homework
Chapter 3, Page 103
1. Problems 16, 17, 18 - Either QM for Windows or Excel QM can be used for these
problems. In addition to answering the questions be sure that you can explain ALL of the
results that are presented.
2. Problem 25 - Model as a decision table and find all results available in the software. I
suggest that you use Excel QM (rather than QM for Windows) in order that you may use
Excel to create the table of data.
3. Problems 28 & 29 – Use Excel QM
4. Let’s Make a Deal
There are two envelopes, each containing an amount of money; the amount of money is either
$5, $10, $20, $40, $80 or $160 and everybody knows this. Furthermore, we are told that one
envelope contains exactly twice as much money as the other. The two envelopes are shuffled,
and we give one envelope to you and one to your opponent. After the envelopes are opened
(but the amounts inside are kept private) you and your opponent are given the opportunity to
switch. If you both want to switch, we let you.
Find the optimal strategy for playing this game. A strategy identifies what you would do
under all situations. Thus for this example you need to decide between switch and don't
switch for any amount of money you are looking at.
Amount of money
in your envelope
$5
$10
$20
$40
$80
$160
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Decision (Circle one)
Offer to switch, Do not offer to switch
Offer to switch, Do not offer to switch
Offer to switch, Do not offer to switch
Offer to switch, Do not offer to switch
Offer to switch, Do not offer to switch
Offer to switch, Do not offer to switch