Decision AnalysisDecision Analysis

Mary WhitesideMary Whiteside

Decision Analysis DefinitionsDecision Analysis Definitions

Actions – alternative choices for Actions – alternative choices for a course of actiona course of action

Events –possible outcomes of Events –possible outcomes of chance happeningschance happenings

Payoffs – a value associated Payoffs – a value associated with the result of each eventwith the result of each event

Decision criteria – rule for Decision criteria – rule for selecting an actionselecting an action

Payoff TablePayoff Table

Event iEvent i Market A1 Market A1 Do not Do not market A2market A2

SuccessSuccess $45.00$45.00 -$3-$3

FailureFailure -$36-$36 -$3-$3

Decision TreeDecision Tree

Market

Don’t

S

F

S

F

$45

-$36

-$3

-$3

(Opportunity Loss)(Opportunity Loss)

Event iEvent i Market A1 Market A1 Do not Do not market A2market A2

SuccessSuccess $45.00 $45.00

(45–45) = 0(45–45) = 0

-$3 -$3

(45-(-3))=48(45-(-3))=48

FailureFailure -$36 -$36

(-3-(-36))=33(-3-(-36))=33

-$3-$3

(-3-(-3))=0(-3-(-3))=0

Criteria for decision makingCriteria for decision making

Maximize expected monetary valueMaximize expected monetary value Minimize expected monetary opportunity Minimize expected monetary opportunity

lossloss Maximize return to risk ratio Maximize return to risk ratio

E monetary V/E monetary V/ Maximize maximum monetary value Maximize maximum monetary value

(maximax) – best best case monetary (maximax) – best best case monetary valuevalue

Maximize minimum monetary value Maximize minimum monetary value (maximin) – best worst case monetary (maximin) – best worst case monetary valuevalue

Minimize maximum opportunity loss Minimize maximum opportunity loss (minimax) – best worst case for opportunity (minimax) – best worst case for opportunity lossloss

Criteria for decision making Criteria for decision making using utilityusing utility

Maximize expected utilityMaximize expected utility Minimize expected utility Minimize expected utility

opportunity lossopportunity loss Maximize return to risk ratio Maximize return to risk ratio

E utility V/E utility V/

Expected value of perfect Expected value of perfect information (EVPI)information (EVPI)

EVPI = minimum expected EVPI = minimum expected opportunity lossopportunity loss

EVPI = expected profit under EVPI = expected profit under certainty – expected value of the certainty – expected value of the best alternativebest alternative