Operations Research Decision Making Under Uncertainty

Pages: 5 (1652 words) Published: June 11, 2013
Purdue University Leyla Ozsen

IE 383 Fall 2005

DECISION ANALYSIS Making important decisions often requires treating major uncertainty, long time horizons, and complex value issues. To deal with such problems, the discipline of decision analysis was developed. The discipline comprises the philosophy, theory, methodology, and professional practice necessary to formalize the analysis of important decisions. Decision Analysis is a set of quantitative decision-making techniques for decision situations in which uncertainty exists. Decision analysis represents not only a collection of decisionmaking techniques but also an analysis of logic underlying decision making. Decision-making requires choosing between alternatives. While the range of alternatives to be considered is set by the decision-maker, the decision analyst may be able to suggest new alternatives as the analysis progresses. Many decision problems become relatively trivial if uncertainty is removed. For example, consider how easily a decision-maker could make a critical decision in launching a new commercial product if he/she could predict with certainty production and sales costs, pricedemand relationships, and governmental decisions. Decision analysis treats uncertainty effectively by encoding informed judgment in the form of probability assignments to events and variables. One of the most basic concepts in decision analysis is the distinction between a good decision and a good outcome. A good decision is a logical decision -- one based on the information, values, and preferences of the decision-maker. A good outcome is one that is profitable, or otherwise highly values. In short, a good outcome is one that we wish would happen. By making good decisions in all situations that face us, we hope to ensure as high a percentage of good outcomes as possible. We may be disappointed to find that a good decision has produced a bad outcome, or dismayed to learn that someone who has made what we consider to be a bad decision has achieved a good outcome. Short of having a clairvoyant ( or perfect information), however, making good decisions is the best way to pursue good outcomes.

An important benefit of decision analysis is that it provides a formal, unequivocal language for communication among the people included in the decision-making process. During the analysis, the basis for a decision becomes evident, not just the decision itself. A disagreement about whether to adopt an alternative may occur because individuals possess different relevant information or because they place different values on the consequences. The formal logic of decision analysis subjects these component elements of the decision process to scrutiny. Information gaps can be uncovered and filled, and differences in values can be openly examined. Revealing the sources of disagreement usually opens the door to cooperative resolution. -1-

Purdue University Leyla Ozsen

IE 383 Fall 2005

Decision-Making Decision-making situation includes several components: - the decisions themselves (alternatives, options) - the events that may occur in the future, known as states of nature or scenarios. - Payoff is the outcome of the decision. Example: As a recent graduate from Purdue, you are planning your career for the next two years. You can’t decide whether to take the job offer now with a salary of 40,000 for the first year and defer your acceptance to grad school for a year or go to grad school first and find a similar job next year. If you choose to attend the graduate school this year and the economy turns out to be poor in a year, then after graduation you may end up not finding a job for awhile and your earnings the second year will only be \$15,000 since you were unemployed part of the year. If the economy turns out to be good in a year, then you may find even a better job with the extra education you have, and that would provide a better starting salary of 50,000. However if you take the job this...