Decision Analysis Pertemuan Matakuliah: A Strategi Investasi IT Tahun: 2009

Bina Nusantara University 3 Introduction Two commonly used sets of decision-making methodologies

Decision Theory Collection of methodologies and principles used to make single, alternative choice of decisions Procedural mathematics and statistical are used Application in IT decision-making is presented Bina Nusantara University 4

Decision theory problems/elements 1.Alternatives/choices/strategies : Independent decision variables Represent alternative action to select 2. States of nature : Independent events assumed to occur in the future Example : economic recession, depression 3. Payoffs : Dependent parameters assumed to occur give a particular alternative is selected Example : profit, cost Bina Nusantara University 5

Types of decision environments Certainty : Knows clearly what alternatives to choose and the payoff for each choice Risk : Some information on the payoffs are available but presented in a probabilistic Uncertainty : No information about likelihood of states of nature occurring is available

Decision Theory Model Formulation Identify and list as rows the alternatives to choose from Identify and list as columns the states of nature that can occur Identify and list in the appropriate row and column the payoffs Formulate the problem/model as payoff table  See Table 2-3

Decision-Making Under Certainty Maximax criteria : 1.Select the maximum payoff for each alternative 2.Select the alternative of maximum payoffs  See Table 4 Maximin criteria : 1.Select the minimum payoff for each alternative 2.Select the alternative of minimum payoffs  See Table 5

Decision-Making Under Risk Origin of probabilities : The probability of past events or experiments will follow the same pattern in the future The probabilities are stable in the process that is being observed The sample size is adequate to represent the past behaviour

Expected Value Criteria Determined by computing weighted estimate of payoff for each alternative Select the alternative with the best payoff. If the problem has profit or sales payoffs, the best payoff would be the largest expected payoff Expected opportunity loss criteria is based on the logic of avoidance of loss or to minimize the loss.

Decision-Making Under Uncertainty Laplace Maximin Maximax Hurwicz Minimax