Chapter 1

1. Chapter 1 Introduction to Decision Making

2. Decision Analysis • Science? • “…prescriptive approach designed for normally intelligent people who want to think hard and systematically about some important real problems.” - Keeney and Raiffa, 1976 • Emotion? • “…when should we trust our instincts, and when should we be wary of them?…that our snap judgments and first impressions can be educated and controlled." - Malcolm Gladwell, 2005

3. Decision Making • What makes decisions difficult? • What is a good decision?

4. Decision Making • What makes decisions difficult? • Uncertainty • Lack of control • Complexity • Trade-offs What else????

5. Decision Making • What makes a good decision? • Achieves goal • Makes money • Does not reduce utility • Minimizes risk What else????

6. Decision Making Elements • Values & Objectives • What’s important to you? • What do you want to achieve? • Decision Context • Uncertain Events • States of Nature • Consequences • Payoffs

7. Decision Making • Good decision / good outcome • Good decision / unlucky outcome • Bad decision / lucky outcome • Bad decision / bad outcome Rainy day; Take umbrella; Rains, stay dry. Sunny day; Don’t take umbrella; Rains, get wet. Rainy day; don’t take umbrella; No rain, stay dry. Rainy day; Don’t take umbrella; Rains, get wet.

8. Decision Making – Studying! Outcome: Good Bad Decision is: Good Bad

9. Components of Decision Models Defined by probability distributions Exogeneous Variables to make decision about Performance variables Decision Variables MODEL = set of relationships Endogeneous Policies/ Constraints Rules, restrictions, what-ifs

10. Decision Analysis Process Identify the problem Structuring the problem Identify objectives, criteria and alternatives • Decompose and model the problem: • Qualitative Considerations • Quantitative Considerations Analyzing the problem Choose the best alternative

11. Decision Analysis Process Cont’d Choose the best alternative Sensitivity Analysis Is further analysis needed? Problem Solving encompasses all of the above and these steps YES NO Implement the chosen alternative

12. Types of Decision Models Conditions: Certainty Risk/Uncertainty Decision is: Case study; Breakeven analysis Decision analysis, Simple Utility theory Goal Prog; AHP Markov analysis Complex Utility theory Dynamic Prog Probabilistic Dynamic Prog.; Simulation Dynamic

13. Student Introductions Decisions You’ve Made?

14. For Next Class • Begin reading Chapter 14 • Do HW #2 & 3