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    Decision Theory

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    Abeb Arboleda-Depon
    Using the maximax criterion, the best decision is to build a shopping center, which would yield a maximum profit of $5,250,000 if material costs remain stable. Using the maximin criterion, the best decision is to lease equipment, which would yield a minimum profit of $2,000,000 regardless of material costs. Using the minimax regret criterion, the best decision is also to lease equipment, which would result in the lowest maximum regret of $0.

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    Decision Theory

    Uploaded by

    Abeb Arboleda-Depon
    25 views17 pages
    Using the maximax criterion, the best decision is to build a shopping center, which would yield a maximum profit of $5,250,000 if material costs remain stable. Using the maximin criterion, the best decision is to lease equipment, which would yield a minimum profit of $2,000,000 regardless of material costs. Using the minimax regret criterion, the best decision is also to lease equipment, which would result in the lowest maximum regret of $0.

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    Using the maximax criterion, the best decision is to build a shopping center, which would yield a maximum profit of $5,250,000 if material costs remain stable. Using the maximin criterion, the best decision is to lease equipment, which would yield a minimum profit of $2,000,000 regardless of material costs. Using the minimax regret criterion, the best decision is also to lease equipment, which would result in the lowest maximum regret of $0.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    25 views17 pages

    Decision Theory

    Uploaded by

    Abeb Arboleda-Depon
    Using the maximax criterion, the best decision is to build a shopping center, which would yield a maximum profit of $5,250,000 if material costs remain stable. Using the maximin criterion, the best decision is to lease equipment, which would yield a minimum profit of $2,000,000 regardless of material costs. Using the minimax regret criterion, the best decision is also to lease equipment, which would result in the lowest maximum regret of $0.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 17

    To a extent , the success or failure that a person experiences in life

    depends upon the decision he or she makes. There are several


    examples we know where good decisions made individual's destiny.

     A good decision is one that is based on logic, considers all


    available data and possible alternatives, and applies
    quantitative approach. Its rare possibility, that a good decision
    brings unexpected or unfavorable results/outcomes.
     Sometimes it happened when you make a bad decision but
    are lucky to get favorable outcome, it is said that you still
    make a bad decision.

     So, the decision theory is an analytic and systematic


    way to tackle problems
    DECISION THEORY
    - A methodology for making management decisions which constitutes a
    particular branch of operations research/decision science.

    - Also defined as the analysis of decision situations in which certainly cannot be


    assumed.
    Most of the time decision makers must choose among several different courses of
    action in an attempt to optimize his decision process.

    It must be noted that decision theory merely provides a rational way of choosing
    among several alternative strategies.
    STEPS IN DECISION MAKING
    1. Clearly define the problem.
    2. List all the possible alternative events that may occur.
    3. Determine all possible outcomes.

    4. Identify the profit/loss of each combination of alternatives events and outcomes.

    5. Choose one mathematical decision theory model.

    6. Apply the model and make the decision.


    DECISION MAKING CRITERIA

    Maximax Maximin
    criterion/Optimistic Criterion/Conservative
    approach Approach Minimax Regret Criterion
    The maximax criterion maximizes The maximin criterion simply It involves the construction of an
    the maximum payoffs for the maximizes the minimum payoffs given opportunity loss or regret matrix prior
    different decisions starting with the the various decisions that are possible. to applying the minimax rule. Costruct
    an opportunity loss table by
    identification of the maximum It is a two-step process once the payoff transforming each element in the payoff
    payoffs of each alternative table has been formulated. The first step table to an opportunity loss. The degree
    decision. is to identify the minimum payoff for of the opportunity loss for a given
    each decision. The second step is to element is the loss incurred by not
    The maximax decision is that select the largest minimum payoff. selecting the optimal alternative
    decision which yields the largest decision given a state of nature.
    The maximin rule is a very conservative
    maximum payoffs. one that takes a pessimistic view on the Converting a payoff table to an
    The maximax rule is an extremely various states of nature. opportunity loss table is composed of
    two-step iterative proces
    optimistic criterion for choosing
    alternative decisions
    EXAMPLE

    A farmer in Region 6 must decide which crop to plant next year on his land: corn, peanuts,
    or soybeans. The return from each crop will be determined by whether a new trade bill with
    Hongkong passes the Senate. The profit the farmer will realize from each crop given the two
    possible results on the trade bill is shown in the following payoff table.

    Trade Bill
    Crop Pass Fail
    Corn 2, 000, 000 700, 000
    Peanuts 1, 100, 000 500, 000
    Soybeans 1, 400, 000 1, 200, 000

    Determine the best crop to plant using the following criteria.


    a. Maximax
    b. Maximin
    c. Minimax Regret
    SOLUTION:
    A. Maximax Criterion
    STEP 1. SELECT THE COLUMN WITH
    MAXIMUM PAYOFF.
    TRADE BILL
    CROP PASS FAIL
    CORN 2, 000, 000 700, 000
    PEANUTS 1, 100, 000 500, 000
    SOYBEANS 1, 400, 000 1, 200, 000

    Maximum payoff
    STEP 2. IDENTIFY THE HIGHEST MAXIMUM
    PAYOFF
    Crop Maximax Payoffs
    Corn 2, 000, 000 maximum
    Peanuts 1, 100, 000
    soybeans 1, 400, 000

    Decision: The planting of corn will result in a maximax payoff of 2, 000, 000.
    B. MAXIMIN CRITERION
    • Step 1. Select the column with minimum payoff.
    Trade Bill
    Crop Pass Fail
    Corn 2, 000, 000 700, 000
    Peanuts 1, 100, 000 500, 000
    Soybeans 1, 400, 000 1, 200, 000

    Minimum Payoff
    STEP 2. IDENTIFY THE LOWEST MINIMUM
    PAYOFF.

    Crop Minimum Payoffs


    Corn 700, 000
    Peanuts 500, 000 minimum
    Soybeans 1, 200, 000

    Decision: The planting of peanuts will result in a minimum payoff of 500, 000.
    C. MINIMAX REGRET CRITERION
    • Step 1. Determine the largest element in first column.

    Trade Bill
    Crop Pass Fail
    Corn 2, 000, 000 700, 000
    Peanuts 1, 100, 000 500, 000
    Soybeans 1, 400, 000 1, 200, 000
    Step 2. Subtract every element from the largest payoff in both columns.

    Pass
    Corn - 2, 000, 000 – 2, 000, 000 = 0
    Peanuts - 2, 000, 000 – 1, 100, 000 = 900, 000
    Soybeans - 2, 000, 000 – 1, 400, 000 = 600, 000
    Fail
    Corn - 1, 200, 000 – 700, 000 = 500, 000
    Peanuts - 1, 200, 000 – 500, 000 = 700, 000
    Soybeans - 1, 200, 000 – 1, 200, 000 = 0
    Trade Bill
    Crop Pass Fail
    Corn 0 500, 000
    Peanuts 900, 000 700, 000
    Soybeans 600, 000 0
    STEP 3. IDENTIFY THE MAXIMUM REGRETS
    Crop Maximum
    Regrets
    Corn 500, 000 minimum
    Peanuts 900, 000
    Soybeans 600, 000

    Decision: The planting of corn will result in, at


    most, 500, 000 in regret.
    Thank You.
    Any Question?
    GET ONE WHOLE SHEET OF
    YELLOW PAPER.

    ANSWER THE FOLLOWING.


    EXERCISE. The owner of the Beta Construction Company must decide among building a
    housing development, constructing a shopping center, or leasing all the company’s equipment
    to another company. The profit that will result from each alternative will be determine by
    whether material costs remain stable or increase. The profit from each alternative given the
    two possibilities for material costs is shown in the following payoff table.

    Material Costs
    Decision Stable Increase
    Houses 3, 500, 000 1, 500, 000
    Shopping Center 5, 250, 000 1, 000, 000
    Leasing 2, 000, 000 2, 000, 000

    Determine the best decision using the following decision criteria.


    a. Maximax
    b. Maximin
    c. Minimax Regret

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