Page 304 - DCOM303_DMGT504_OPERATION_RESEARCH

Unit 14: Decision-making

3. EVPI = EPPI – EMV* = 100 – 54 = 46 Notes
Thus, EVPI = ` 46,000

Self Assessment

Fill in the blanks:
8. In ..................................... situation, there in no control over the occurrence of given state of
nature.
9. The ..................................... value may be intuitively understood by the law of large numbers.
10. The ..................................... may be defined as the maximum amount one would be willing
to pay to obtain perfect information about the state of nature that would occur.
11. A ..................................... is used as a visual and analytical tool, where the expected values
(or expected utility) of competing alternatives are calculated.
12. The ..................................... criterion assures the decision maker that he will earn no less (or
pay no more) than some specified amount.

13. Decision under certainty means that each alternative leads to .....................................
14. All types of human decision-making are ..................................... processes.

14.7 Summary

 Decision-making can be regarded as an outcome of mental processes (cognitive process)
leading to the selection of a course of action among several alternatives.
 Every decision-making process produces a final choice.
 The output can be an action or an opinion of choice.
 Decision analysis includes procedures, methods, and tools for: (a) identifying, representing,
and assessing the important aspects of a decision situation, for (b) prescribing the
recommended course of action by applying the maximum expected utility action axiom to
a well-formed representation of the decision, and (c) translating the formal representation
of a decision and its corresponding recommendation into insight for the decision maker
and other stakeholders.
 The decision analysis helps a decision maker to choose the most feasible one from among
all the alternatives available under the uncertainty they face and the situations of risk they
are threatened with.
 Given a carefully defined problem, a conceptual model is generated first.
 This is followed by the selection of the appropriate quantitative model that may lead to a
solution.
 Lastly, a specific algorithm is selected.
 A decision tree is one of the operations research tools that can be used to assist management
in making decisions under uncertainty.

 The decision tree provides a graphical representation of the decision-making process.
 Utility is a measure of the total worth of a particular outcome.
 It reflects the decision maker's attitude toward a collection of factors such as profit, loss
and risk.

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