Decision Model Theory Essay

Casehither we use the Thompson log Company case as an grammatical case to illustrate these last-placeity theory tones. commode Thompson is the fo at a lower place and president of Thompson Lumber Company, a profitable firm located in Portland, Oregon. step 1The problem that throw out buoy Thompson identifies is whether to expand his product line by manufacturing and marketing a new product, backyard retentiveness sheds.Step 2* The second measuring rod is to list the alternate. * Thompsons second tread is to generate alternate(a)s that ar available to him .In finish theory the alternative is a drift of bodily function or strategy that the finding yield outr can involve . concord to him his alternatives are to construct 1 a outsize new plant to manufacture the stock sheds 2 a sm completely plant, or3 no plant at all* So, the ending manufacturers should try to make all achievable alternatives ,on some matter even the least important alternative might turn o ut to be the best choice.Step 3* ordinal step is to identify thinkable takes. * The criteria for action are established at this time. According to Thompson there are deuce possible outcomes the market for the storage sheds could be prospering doer there is a senior high demand of the product or it could be un gold means that there is suffering demand of the product. * Optimistic decision producers list to ignore bad outcomes where as bearish managers whitethorn discount a favorable outcome. If you dont consider all possibilities, it pull up stakes be difficult to make a logical decision, and the result may be undesirable. * There may be some outcomes over which the decision maker has little or no affirm is sack outn as states of nature.Step 4* Fourth step is to list issuances. * This step is to list tax return resulting from from for separately one one possible combination of alternatives and outcomes. Because in this case he wants to maximize his lettuce, he use profits to evaluate each consequences .Not every decision, of course, can be ground on currency alone any appropriate means of measuring benefit is acceptable. In decision theory we call such payoff or profits conditional grades.Step 5 & 6* The last 2 steps are to select and practice the decision theory model. * Apply it to the entropy to help make the decision. Selecting the model depends on the environment in which you are operate and the amount of risk and uncertainty involved. * end Table with condition judges for ThompsonTYPES OF ratiocination MAKING ENVIRONMENTS* The types of decisions people make depends on how much comeledge or teaching they brace nigh the situation. There are three kind of decision fashioning environments* finale make under certainty.* finis making under risk.* purpose making under uncertainty.Decision Making beneath Certainty* here(predicate) the decision makers know about the certainty of consequences every alternative or decision c hoice has. * of course they will choose the alternative that will result in the best outcome. * exercising Lets say that you have $10000 to endow for a result of one year. And you have two alternatives every to open a savings delineate paying 6% interest and another(prenominal) is investing in Govt. Treasury adhere paying 10% interest. If both the investments are secure and guaranteed, the best alternative is to choose the second investment option to assoil uttermost profit.Decision Making under(a) Risk* Here the decision producer knows about the several possible outcomes for each alternative and the probability of occurrence of each outcome. * Example The probability of being dealt a club is 0.25. The probability of rolling a 5 on die is 1/6. * In the decision making under risk, the decision maker usually attempts to maximize his or her evaluate strong being. Decision theory models for business problems in this in this environment typically employ two equivalent criteri a maximization of expected financial cheer and minimization of expected loss. * pass judgment monetary take account is the weighted revalue of possible payoffs for each alternativeDecision Making under Uncertainty* Here there are several outcomes for each alternative, and the decision maker does not know the probabilities occurrences of various outcomes. * Example The probability that a Democrat/Republican will be the President of a country 25 Years from now is not cognise. * The criteria that is cover in this section as follows1 Maximax this beat find the alternative that maximizes the maximum payoffs or consequence for every alternative. Here we counterbalance locate the maximum payoff with every alternative and then break up that alternative with the maximum number. This is also known as optimistic decision criterion.* Maximin this criterion finds the alternative that maximizes the minimum payoff or consequence for every alternative. Here we first locate the minimum o utcome indoors every alternative and then find fault that alternative with maximum number. This is called as pessimistic decision criterion. * Criterion of Realism as well as called as weighted average, is a via media amongst an optimistic and a pessimistic decision. Let the coefficient of realism is a selected. The coefficient is between 0 and 1. When a is close to 1, the decision maker is optimistic about the future. When a is close 0 the decision maker is pessimistic. It helps the decision maker to build feelings about relative optimism and pessimism. * Weighted average =a (maximum in row) + (1-a)(minimum in row). * Equally potential (Laplace)-one criterion that uses all the payoffs for each alternative is the equally likely also called Laplace decision criterion. This is to find alternative with highest payoff. * Minimax Regret the final decision criterion that we discuss is based on opportunity loss or regret.Expected Value of Perfect selective culture* FormulaEVPI = A BA = expected value with complete informationB = expected value without perfect informationCalculation of (A) valueA = the best of each outcome x their prob.The best of outcomesBest outcome= (100,000) (30,000)A= 0.6 x 100,000 + 0.4 x 30,000 = 72,000Calculation of (B) valueB = we select the max value of each given below force of each event0.6(50000) + 0.4 (30,000)= 42,0000.6(100,000 -0.4(40,000)= 44,0000.6(30,000) + 0.4(10,000)= 20,000The max value for all computed value = 44,000EVPI = A B= 72,000 44,000= 28,000Expected Opportunity LossThe expected opportunity loss is the expected value of the regret for each decision (Minimax)EOL (Apartment) = $50,000(.6) + 0(.4) = 30,000EOL (Office) = $0(.6) + 70,000(.4) = 28,000EOL (Warehouse) = $70,000(.6) + 20,000(.4) = 50,000 peripheral Analysis* Most of our decisions are do following our marginal analysis of cost and benefits * To achieve a given outcome we often have to make a choice from among alternative means we commonly try to make the least costly choice among the available means * sometimes our decisions result in benefits as well as costs * How much victuals should you buy?* How many years of development should you have?* How many hours should you work?* How many workers should you hire?* How much should save/invest?