Transcript Chapter 04
Chapter 9 - Decision Analysis - Part II • • • • • • • Decision Making under Uncertainty with Probabilities Decision Tree Expected Value of Perfect Information Bayes’ Theorem and Posterior Probabilities Expected Value of Sample Information Developing a Decision Strategy Efficiency of Sample Information 1 - Chap 09 Decision Making Under Uncertainty With Probabilities Expected Value Approach – The decision maker generally will have some information about the relative likelihood of the possible states of nature. These are referred to as the prior probabilities. – If probabilistic information regarding the states of nature is available, one may use the expected value (EV) approach. – Here the expected return for each decision is calculated by summing the products of the payoff under each state of nature and the probability of the respective state of nature occurring. – The decision yielding the best expected return is chosen. 2 - Chap 09 Expected Value of a Decision Alternative The expected value of a decision alternative is the sum of weighted payoffs for the decision alternative. The expected value (EV) of decision alternative di is defined as: EV(d i ) where: n P(s j )Vij j 1 n = the number of states of nature P(sj ) = the probability of state of nature sj Vij = the payoff corresponding to decision alternative di and state of nature sj 3 - Chap 09 Example: Burger Prince Burger Prince Restaurant is planning to open a new restaurant on Main Street. It has three different models under consideration, each with a different seating capacity. Three decisions: d1: Model A: Small capacity d2: Model B: Medium capacity, and d3: Model C: Large capacity Burger Prince estimates that the average number of customers per hour will be 80, 100, or 120. Three states of nature: s1 = 80 s2 = 100, and s3 = 120 4 - Chap 09 Example: Burger Prince The profit payoff table for the three models is as follows: PAYOFF TABLE Decision Alternative d1: Model A d2: Model B d3: Model C State of Nature Average Number of Customers Per Hr s1 = 80 s2 = 100 s3 = 120 $10,000 $15,000 $14,000 $8,000 $18,000 $12,000 $6,000 $16,000 $21,000 Burger Prince has estimated that the prior probabilities of S1, S2 and S3 are 0.4, 0.2 and 0.4 respectively. Question: Using the expected value approach, which model should Burger Prince choose in order to maximize the profit payoff? 5 - Chap 09 Example: Burger Prince Expected Value Approach PAYOFF TABLE Decision Alternative d1: Model A d2: Model B d3: Model C Probability State of Nature Average Number of Customers Per Hr s1 = 80 s2 = 100 s3 = 120 $10,000 $15,000 $14,000 $8,000 $18,000 $12,000 $6,000 $16,000 $21,000 0.4 0.2 0.4 Maximum Expected Value Expected Value $12,600 $11,600 $14,000 Recommended Decision d3: Model C $14,000 6 - Chap 09 Decision Trees • A decision tree is a chronological representation of the decision problem. • Each decision tree has two types of nodes; round nodes correspond to the states of nature while square nodes correspond to the decision alternatives. • The branches leaving each round node represent the different states of nature while the branches leaving each square node represent the different decision alternatives. • At the end of each limb of a tree are the payoffs attained from the series of branches making up that limb. 7 - Chap 09 Example: Burger Prince Payoffs • Decision Tree 2 d1 1 .4 .2 .4 10,000 15,000 14,000 d2 d3 s1 s2 s3 3 4 s1 s2 s3 s1 s2 s3 .4 .2 .4 .4 .2 .4 8,000 18,000 12,000 6,000 16,000 21,000 8 - Chap 09 Steps to Conduct Decision Tree Analysis 1. 2. 3. 4. 5. 6. Define the problem. Structure or draw the decision tree. Assign probabilities to the states of nature. Estimate payoffs for each possible combination of alternatives and states of nature. Solve the problem by computing expected monetary value (EMV) for each state of nature node. Choose the best decision alternative at each decision node and eliminate the other decisions. Example: Burger Prince Expected Value For Each Decision d1 EMV = .4(10,000) + .2(15,000) + .4(14,000) 2 = $12,600 Model A 1 Model B Model C d2 EMV = .4(8,000) + .2(18,000) + .4(12,000) 3 = $11,600 d3 EMV = .4(6,000) + .2(16,000) + .4(21,000) 4 = $14,000 Choose the model with the largest EMV, Model C. 10 - Chap 09 Decision Making Under Certainty Expected Value of Perfect Information (EVPI) • Frequently information is available which can improve the probability estimates for the states of nature. • The expected value of perfect information (EVPI) is the increase in the expected profit that would result if one knew with certainty which state of nature would occur. • The EVPI provides an upper bound on the expected value of any sample or survey information. 11 - Chap 09 Expected Value of Perfect Information EVPI Calculation – Step 1: Determine the optimal return corresponding to each state of nature. – Step 2: Compute the expected value of these optimal returns (EPPI). – Step 3: Subtract the EV of the optimal decision from the amount determined in step (2). 12 - Chap 09 Expected Value of Perfect Information Example: Burger Prince Expected Value of Perfect Information PAYOFF TABLE Decision Alternative d1: Model A d2: Model B d3: Model C Probability State of Nature Average Number of Customers Per Hr s1 = 80 s2 = 100 s3 = 120 $10,000 $15,000 $14,000 $8,000 $18,000 $12,000 $6,000 $16,000 $21,000 0.4 0.2 0.4 Maximum Expected Value Maximum Payoff $10,000 $18,000 $21,000 Expected Value $12,600 $11,600 $14,000 Recommended Decision d3: Model C $14,000 EPPI $16,000 EVPI $2,000 13 - Chap 09 Expected Value of Perfect Information Example: Burger Prince Expected Value of Perfect Information Calculate the expected value for the optimum payoff for each state of nature and subtract the EV of the optimal decision. EVPI= .4(10,000) + .2(18,000) + .4(21,000) - 14,000 = $2,000 14 - Chap 09 Expected Value of Sample Information Example: Burger Prince Sample Information Burger Prince must decide whether or not to purchase a marketing survey from Stanton Marketing for $500. The results of the survey are "favorable (F)" or "unfavorable (U)". The conditional probabilities are: P(favorable | 80 customers per hour) = P(F|S1) = 0.2 P(favorable | 100 customers per hour) = P(F|S2) = 0.5 P(favorable | 120 customers per hour) = P(F|S3) = 0.9 Should Burger Prince have the survey performed by Stanton Marketing? 15 - Chap 09 Expected Value of Sample Information Example: Burger Prince Legend: Decision Chance Consequence Market Survey Results Avg. Number of Customers Per Hour Market Survey Restaurant Size Profit 16 - Chap 09 A complete Tree Diagram d1 d2 A1 No survey d3 A2 Survey F U d1 d2 d3 d1 d2 d3 17 - Chap 09 Bayes’ Theorem and Posterior Probabilities • Knowledge of sample or survey information can be used to revise the probability estimates for the states of nature. • Prior to obtaining this information, the probability estimates for the states of nature are called prior probabilities. • With knowledge of conditional probabilities for the outcomes or indicators of the sample or survey information, these prior probabilities can be revised by employing Bayes' Theorem. • The outcomes of this analysis are called posterior probabilities for decision trees. 18 - Chap 09 Computing Posterior Probabilities Posterior Probabilities Calculation – Step 1: For each state of nature, multiply the prior probability by its conditional probability for the indicator -- this gives the joint probabilities for the states and indicator. – Step 2: Sum these joint probabilities over all states -- this gives the marginal probability for the indicator. – Step 3: For each state, divide its joint probability by the marginal probability for the indicator -- this gives the posterior probability distribution. 19 - Chap 09 Example: Burger Prince Posterior Probabilities Favorable State Prior Conditional Joint Posterior S1 .4 .2 .08 .148 S2 .2 .5 .10 .185 S3 .4 .9 .36 .667 Total .54 1.000 P(F) = .54 20 - Chap 09 Example: Burger Prince Posterior Probabilities Unfavorable State Prior Conditional Joint Posterior S1 .4 .8 .32 .696 S2 .2 .5 .10 .217 S3 .4 .1 .04 .087 Total .46 1.000 P(U) = .46 21 - Chap 09 Expected Value of Sample Information The expected value of sample information (EVSI) is the additional expected profit possible through knowledge of the sample or survey information. 22 - Chap 09 Expected Value of Sample Information EVSI Calculation – Step 1: Determine the optimal decision and its expected return for the possible outcomes of the sample or survey using the posterior probabilities for the states of nature. – Step 2: Compute the expected value of these optimal returns. – Step 3: Subtract the EV of the optimal decision obtained without using the sample information from the amount determined in step (2). 23 - Chap 09 Example: Burger Prince Decision Tree (top half) s1 (.148) d1 2 F (.54) d2 4 s3 (.667) s1 (.148) 5 d3 s2 (.185) s3 (.667) s1 (.148) 6 1 s2 (.185) s2 (.185) s3 (.667) $10,000 $15,000 $14,000 $8,000 $18,000 $12,000 $6,000 $16,000 $21,000 24 - Chap 09 Example: Burger Prince Decision Tree (bottom half) 1 s1 (.696) U (.46) d1 d2 3 7 8 s2 (.217) s3 (.087) s1 (.696) s2 (.217) s3 (.087) $10,000 $15,000 $14,000 $8,000 $18,000 $12,000 d3 9 s1 (.696) s2 (.217) s3 (.087) $6,000 $16,000 $21,000 25 - Chap 09 Example: Burger Prince d1 $17,855 2 F (.54) d2 4 EMV = .148(10,000) + .185(15,000) + .667(14,000) = $13,593 5 EMV = .148 (8,000) + .185(18,000) + .667(12,000) = $12,518 6 EMV = .148(6,000) + .185(16,000) +.667(21,000) = $17,855 7 EMV = .696(10,000) + .217(15,000) +.087(14,000)= $11,433 8 EMV = .696(8,000) + .217(18,000) + .087(12,000) = $10,554 9 EMV = .696(6,000) + .217(16,000) +.087(21,000) = $9,475 d3 1 d1 U (.46) d2 3 $11,433 d3 26 - Chap 09 A complete Tree Diagram $14,000 d1 d2 A1 No survey $14,000 EMV = .4(8,000) + .2(18,000) + .4(12,000) = $11,600 d3 $17,855 A2 Survey $14,900 EMV = .4(10,000) + .2(15,000) + .4(14,000) = $12,600 F (.54) U (.46) EMV = .4(6,000) + .2(16,000) + .4(21,000) = $14,000 d1 d2 d3 d1 d2 $11,433 d3 EMV = .148(10,000) + .185(15,000) + .667(14,000) = $13,593 EMV = .148 (8,000) + .185(18,000) + .667(12,000) = $12,518 EMV = .148(6,000) + .185(16,000) +.667(21,000) = $17,855 EMV = .696(10,000) + .217(15,000) +.087(14,000)= $11,433 EMV = .696(8,000) + .217(18,000) + .087(12,000) = $10,554 EMV = .696(6,000) + .217(16,000) +.087(21,000) = $9,475 27 - Chap 09 Example: Burger Prince Expected Value of Sample Information If the outcome of the survey is "favorable" choose Model C. If it is unfavorable, choose model A. EVSI = .54($17,855) + .46($11,433) - $14,000 = $900.88 Since this is higher than the cost of the survey, the survey should be purchased. 28 - Chap 09 Developing a Decision Strategy Example: Burger Prince General Recommendation: If the survey cost is less than the EVSI, Burger Prince should hire the market research firm to conduct a survey to study the future market. – If the survey result is favourable, Burger Prince should choose model C to obtain an expected payoff of $17,855. – If the survey result is unfavourable, Burger Prince should choose model A to obtain an expected payoff of $11,433. If the survey cost is higher than the EVSI, Burger Prince should not hire the market research firm to conduct a survey to study the future market, Burger Prince should choose model C to obtain an expected payoff of $14,000. 29 - Chap 09 Efficiency of Sample Information • Efficiency of sample information measure the value of the market research information. • Is the ratio of EVSI to EVPI. • As the EVPI provides an upper bound for the EVSI, efficiency is always a number between 0 and 1. EVSI Efficencyof sample information * 100% EVPI 30 - Chap 09 Example: Burger Prince • Efficiency of Sample Information: The efficiency of the survey: EVSI/EVPI = ($900.88)/($2000) = .4504 31 - Chap 09 Chapter Summary Decision with PRIOR information Decision with PERFECT information Decision with POSTERIOR information EPSI EV* EPPI EVSI EVPI EV* = Expected payoff with PRIOR information EPSI = Expected payoff with POSTERIOR information EVSI = Expected value of SAMPLE (POSTERIOR) information EPPI = Expected payoff with PERFECT information EVPI = Expected value of PERFECT information 32 - Chap 09