Decision Support Tools

DECISION SUPPORT TOOLS
STUDENT ID:
[Pick the date]

Question 1
(a) The payoff matrix is a useful tool for decision making when there is uncertainty with
regards to the future state of economy or other economic parameters. This matrix allows
the respective payoffs based on the different choices that the decision maker may assume
based on the underlying likelihood of the different states in the future. The key steps
involved are enumerated below (Taylor & Cihon, 2014).
Step 1: Define the future states with respective probability of occurrence
Step 2: Identify the various decisions from which the optimal choice ought to be made.
Step 3: Outline the potential payoff associated with different choices under the defined
states.
(b) Two most common tools used for decision making are decisions trees and payoff matrix.
Both these methods have their own pros and cons owing to which there are situations
when one would be preferred over the other. With regards to decision tree, the key
advantage arises is scenarios where the decision making tends to sequential owing to
which the intermediate decisions leading to the final outcome assume high importance
and require detailed analysis which can be facilitated through decision trees (Lieberman,
Nag, Hiller, & Basu, 2014).
(c) The objective is to provide the best option for George among the three options (ROB1,
ROB2, do not purchase) based on the relevant approach used.
(1) Payoff matrix of the alternatives
(2) Optimist approach
Max value of max column value = ROB1
(3) Pessimist approach
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Max value of min column value = Do not purchase
(4) Lapalce criterion approach
Max average of average value = Either ROB1 or ROB 2 (both shows same average)
(5) Criterion of regret approach
Minimum value of max row value = ROB2
(6) EMV approach
Max EMV value = ROB 1
Question 2
Notation
(a) Revised prior probabilities
The respective probabilities can be determined as shown below.
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Output from excel
(b) Posterior probabilities that event is favourable market and positive
P ( S 1|Y 1 )= 0.6∗0.9
( 0.6∗0.9 ) + ( 0.4∗0.8 )
P ( S 1|Y 1 )=0.63
(c) EVSI = 23802 (Expected value with sample information) – 14000 (Expected value
without sample information) = $9802
ENGSI = EVSI – Survey cost = 9802 – 5000 = $4802
(d) EVPI = 23802 (Expected value with sample information) – 14000 (Expected value
without sample information) = $9802
Question 3
The ABC’s average profit and daily profit for flight (30 days) has determined via MONTE
CARLO SIMULATION and the model is given below.
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