Mini-course 1 Decision Analysis (Dr. Mariya Sodenkamp) / Class 3 / ITB_L3_ 2015_04_20
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Decision environments
• Decision making under certainty
Decision maker knows the consequences of each potential action or alternative choice.
• Decision making under uncertainty
Decision maker cannot predict the outcome, but he/she knows what decision environments can be faced. Consequences may change in these environments.
• Decision making under risk
Decision maker can assign probabilities of various environments or outcomes.
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IT in Business: Decision Analysis| © Sodenkamp
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Criteria |
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Priori3es |
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Decision Alternatives |
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Decision Criteria |
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= f (w , pCj ) |
i = 1,..., I; j = 1,..., J |
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Criteria Weights |
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pCjAi Performance of Alternatives on the Criteria wAi Utility of Alternatives
IT in Business: Decision Analysis| © Sodenkamp |
12 |
Location choice problem
An expanding multinational bank is going to establish a branch in one of the regions: A, B or C. The critical success factors are: high employment rate, low number of competitors, high average bank deposit per capita and high population. The aim of the bank is to decide in which region a branch should be opened. The data describing the alternative solution is collected and arangend into the matrix below:
Decision |
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Decision criteria |
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Alternatives |
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Employment |
Number of |
Bank Deposit |
Population |
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Rate, % |
Competitors |
Per Capita, Euro |
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A |
70 |
5 |
31,500 |
4,260,351 |
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B |
65 |
4 |
27,600 |
7,283,682 |
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C |
55 |
3 |
24,200 |
9,590,715 |
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IT in Business: Decision Analysis| © Sodenkamp
Normalization
Alternatives, |
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Criteria, |
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Cj, j=1,…,J |
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A1 |
w11 |
w12 |
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A2 |
w21 |
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wij |
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wI2 |
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wIJ |
Normalization is needed to present all measurements in the dimensionless view
Distributive normalization |
wij ' |
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wij |
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is used to distribute a unit |
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priority among the objectives/alternatives |
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within one group. Normal weights of |
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the objectives or alternatives |
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add up to one in their group. |
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IT in Business: Decision Analysis| © Sodenkamp
Decision |
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Decision criteria |
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Alternatives |
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Employment Rate |
Number of |
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Bank Deposit Per |
Population |
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Competitors |
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Capita |
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A |
70/190=0.37 |
5/12=0.42 |
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31,500/83,300=0.38 |
4,260,351 / 21,134,748 = 0.20 |
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B |
65/190=0.34 |
4/12=0.33 |
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27,600/83,300=0.33 |
7,283,682 / 21,134,748 = 0.34 |
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C |
55/190=0.29 |
3/12=0.25 |
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24,200/83,300=0.29 |
9,590,715 / 21,134,748 = 0.45 |
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IT in Business: Decision Analysis| © Sodenkamp
Normalization: Example (cont’d)
Decision |
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Decision criteria |
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Alternatives |
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Employment |
Number of |
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Bank Deposit Per |
Population |
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Rate |
Competitors |
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Capita |
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Impact |
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A |
0.37 |
- 0.42 |
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0.38 |
0.20 |
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B |
0.34 |
- 0.33 |
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0.33 |
0.34 |
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C |
0.29 |
- 0.25 |
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0.29 |
0.45 |
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IT in Business: Decision Analysis| © Sodenkamp
Working place selec+on (Normaliza+on)
A person is going to change her job for another one and faces a difficult choice: three adequate propositions affected by different circumstances. Relying on the data below, what is the best job?
What do you do first? Normalize!
Criteria
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Job A |
Job B |
Job C |
Salary (S) |
1,600 € |
2,300 € |
1,800 € |
Distance from home(DH) |
4 km |
60 km |
28 km |
Vacation Days (VD) |
20 |
15 |
26 |
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IT in Business: Decision Analysis| © Sodenkamp
Working place selec+on (Normalized decision matrix)
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Alternatives |
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Criteria |
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Job A |
Job B |
Job C |
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Salary (S) |
0.281 |
0.404 |
0.316 |
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Distance from home(DH) |
- 0.043 |
- 0.652 |
- 0.304 |
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Vacation Days (VD) |
0.328 |
0.246 |
0.426 |
IT in Business: Decision Analysis| © Sodenkamp
Sum
1
-1
1
18
DM under certainty
Outlook
• Decision matrix
• Normaliza+on
• Addi+ve value func+on
• Benchmarking
• Main criterion
• Lexicographic method
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Weighed addi+ve value
Given: αj – importance scores of the criteria; w'ij - normal |
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the criteria |
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α'j – normalized importance (weight) of the j-th |
f ( Ai ) = ∑α' j w'ij → max; |
∑α' j =1; |
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criterion |
αEmployment=95; αCompetitors=35; αDeposit=75; αPopulation=35 |
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f(A) = 0.37×0.4 + (- 0.42)×0.15 + 0.38×0.3 + 0.20×0.15 = |
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f(B) = 0.34×0.4 + (- 0.33)×0.15 + 0.33×0.3 + 0.34×0.15 = f(C) = 0.29×0.4 + (- 0.25)×0.15 + 0.29×0.3 + 0.45×0.15 =
IT in Business: Decision Analysis| © Sodenkamp B is the best location