Decision Analysis
Presented by :
Patricia Marie D. Villano, RRT, DBA
2 June 2022
Class Prayer
Prayer Leader:
Let us bow our heads and remember that we are in the
Holy Presence of God.
All:
Dear God, we know You are with us in this class. Bless us with your Grace and help us become better
Laurelians constantly engaged in scholarly pursuits and continually finding optimal and innovative
solutions to challenges and concerns that confront us. Help us to be considerate, compassionate, and
mindful of each other as we strive to accomplish our common objective of bolstering our knowledge and
sharpening our skills with the active participation of students and with guidance of faculty. We pray that
You bless our beloved LPU Davao so it will continue to grow and last for generations to come; will be true
to Laurelian values; and will be faithful to our credo
PRO DEO ET PATRIA, VERITAS ET FORTITUDO.
Amen.
Learning Objectives
1. List the steps of the decision-making process.
2. Explain how to apply each step in decision making in real life scenarios.
3. Describe the types of decision-making environments.
4. Construct a decision tree to aid in decision making.
WHAT IS INVOLVED IN MAKING
GOOD DECISIONS?
To a great extent, the successes
or failures that a person
experiences in life depend on the
decisions that he or she makes.
One decision may make the
difference between a successful
career and an unsuccessful one.
6 STEPS IN DECISION MAKING
Clearly define the List the payoff of each combination
1 4
problem at hand of alternatives and outcomes.
List the possible Select one of the mathematical
2 5
alternatives decision theory models
Identify the possible Apply the model and make
3 6
outcomes or states of nature your decision.
THOMPSON LUMBER COMPANY
1
Should they expand their product line by manufacturing and
Clearly define marketing a new product, backyard storage sheds?
the problem at
hand
THOMPSON LUMBER COMPANY
2 John decides that his alternatives are to construct (1) a large new
plant to manufacture the storage sheds, (2) a small plant, or (3) no
List the
plant at all (i.e., he has the option of not developing the new product
possible
line)
alternatives
THOMPSON LUMBER COMPANY
3 Thompson determines that there are only two possible outcomes:
the market for the storage sheds could be favorable, meaning that
Identify the possible
there is a high demand for the product, or it could be unfavorable,
outcomes or states
meaning that there is a low demand for the sheds.
of nature
THOMPSON LUMBER COMPANY
4
List the payoff of Because Thompson wants to maximize his profits, he can use profit
each combination to evaluate each consequence.
of alternatives and
outcomes
THOMPSON LUMBER COMPANY
4 John Thompson has already evaluated the potential profits
List the payoff of associated with the various outcomes. With a favorable market, he
each combination thinks a large facility would result in a net profit of $200,000 to his
of alternatives and firm.
outcomes
THOMPSON LUMBER COMPANY
4
This $200,000 is a conditional value because Thompson’s receiving
List the payoff of
the money is conditional upon both his building a large factory and
each combination
having a good market.
of alternatives and
outcomes
THOMPSON LUMBER COMPANY
4
List the payoff of The conditional value if the market is unfavorable would be a
each combination $180,000 net loss.
of alternatives and
outcomes
THOMPSON LUMBER COMPANY
4
A small plant would result in a net profit of $100,000 in a favorable
List the payoff of
market, but a net loss of $20,000 would occur if the market was
each combination
unfavorable.
of alternatives and
outcomes
THOMPSON LUMBER COMPANY
4
List the payoff of
Finally, doing nothing would result in $0 profit in either market.
each combination
of alternatives and
outcomes
THOMPSON LUMBER COMPANY
5 6 The last two steps are to select a decision theory model and apply it
to the data to help make the decision.
Select and apply a
Selecting the model depends on the environment in which you’re
decision model and
operating and the amount of risk and uncertainty involved.
make a decision
TYPES OF DECISION MAKING ENVIRONMENTS
Decision making Decision making Decision making
under certainty under uncertainty under risk
decision makers know with certainty the
consequence of every alternative or decision
choice
TYPES OF DECISION MAKING ENVIRONMENTS
Decision making Decision making Decision making
under certainty under uncertainty under risk
You have $1,000 to invest for a 1-year period.
TYPES OF DECISION MAKING ENVIRONMENTS
Decision making Decision making Decision making
under certainty under uncertainty under risk
One alternative is to open a savings account paying 6% interest
and another is to invest in a government Treasury bond paying
10% interest.
TYPES OF DECISION MAKING ENVIRONMENTS
Decision making Decision making Decision making
under certainty under uncertainty under risk
If both investments are secure and guaranteed, there is a
certainty that the Treasury bond will pay a higher return. The
return after one year will be $100 in interest.
TYPES OF DECISION MAKING ENVIRONMENTS
Decision making Decision making Decision making
under certainty under uncertainty under risk
There are several possible outcomes for each alternative, and
the decision maker does not know the probabilities of the various
outcomes
TYPES OF DECISION MAKING ENVIRONMENTS
Decision making Decision making Decision making
under certainty under uncertainty under risk
The probability that a Democrat will be president of the United
States 25 years from now is not known.
TYPES OF DECISION MAKING ENVIRONMENTS
Decision making Decision making Decision making
under certainty under uncertainty under risk
Sometimes it is impossible to assess the probability of
success of a new undertaking or product.
TYPES OF DECISION MAKING ENVIRONMENTS
Decision making Decision making Decision making
under certainty under uncertainty under risk
There are several possible outcomes for each alternative, and
the decision maker knows the probability of occurrence of each
outcome
TYPES OF DECISION MAKING ENVIRONMENTS
Decision making Decision making Decision making
under certainty under uncertainty under risk
We know, for example, that when playing cards using a standard
deck, the probability of being dealt a club is 0.25. The probability
of rolling a 5 on a die is 1/6.
TYPES OF DECISION MAKING ENVIRONMENTS
Decision making Decision making Decision making
under certainty under uncertainty under risk
Decision theory models for business problems in this
environment typically employ two equivalent criteria:
maximization of expected monetary value and minimization of
expected opportunity loss.
DECISION TREES
Any problem that can be presented in a
decision table can also be graphically
illustrated in a decision tree
DECISION TREES
Thompson Lumber:
First, John decides whether to construct
a large plant, a small plant, or no plant.
DECISION TREES
Once that decision is made, the
possible states of nature or outcomes
(favorable or unfavorable market) will
occur.
DECISION TREES
The next step is to put the payoffs and
probabilities on the tree and begin the
analysis.
5 STEPS OF DECISION TREE ANALYSIS
1. Define the problem.
2. Structure or draw the decision tree.
3. Assign probabilities to the states of nature.
4. Estimate payoffs for each possible combination of alternatives
and states of nature.
5. Solve the problem by computing expected monetary values
(EMVs) for each state of nature node.
Learning Objectives
1. List the steps of the decision-making process.
2. Explain how to apply each step in decision making in real life scenarios.
3. Describe the types of decision-making environments.
4. Construct a decision tree to aid in decision making.
Thank You!
Reference:
Quantitative Analysis for
Management
Barry Render
Ralph M. Stair, Jr.
Michael E. Hanna
