Decision Analysis Homework: ADSM May 2018, Coursework Solution

This document presents a detailed solution to a decision analysis homework assignment from Abu Dhabi School of Management, May 2018. It focuses on a payoff table for two alternative courses of action, considering the probabilities of low and high demand. The solution analyzes the optimal decisions based on the Maximax, Maximin, Regret, Maximum Likelihood, and Expected Value criteria. Each criterion is applied to the payoff table, and the optimal course of action is determined. The assignment concludes with a step-by-step introduction being the most appropriate action based on the different methods. References to relevant decision analysis literature are also included. This is a great resource for students learning decision-making under uncertainty.

Abu Dhabi School of Management
Decision Analysis
Individual out of class assessment
May 2018

Q1
1. Payoff table for the two alternative courses of action
The probability of low demand occurring is 0.6
The probability of high demand occurring is 0.4
Construction of the payoff table for the two alternate causes of action
Courses of action States of nature
Occurrence of low
demand
Occurrence of
high demand
A Step by step
introduction
$ 50,000 $ 700,000
A concentrated
introduction
-$ 600,000 $ 1,000,000
Probability 0.6 0.4
2. The optimal decision based on the Maximax Criterion
Under the Maximax criterion the decision maker optimizes his/her profit by selecting
the maximum profit out of the maximum profits under each state of nature
The payoff table
Courses of action States of nature
Occurrence of low
demand
Occurrence of
high demand
Maximum
A Step by step
introduction
$ 50,000 $ 700,000 $ 700,000
A concentrated
introduction
-$ 600,000 $ 1,000,000 $ 1000,000
Probability 0.6 0.4
Under this criterion the optimal course of action will be a concentrated introduction
of the new brand of washing machine.
3. Optimal decision based on the Maximin Criterion

Under the Maximin criterion, the decision that maximizes the profit is to select the
outcome that maximizes the minimum profits under each state of nature
The payoff
Courses of action States of nature
Occurrence of low
demand
Occurrence of
high demand
Minimum
A Step by step
introduction
$ 50,000 $ 700,000 $ 50,000
A concentrated
introduction
-$ 600,000 $ 1,000,000 ($ 600,000)
Probability 0.6 0.4
Under this criterion the optimal course of action will be a step by step introduction
of the new brand of washing machine into the market.
4. Optimal decision based on the Regret Criterion
Under the Regret criterion the optimal course of action will be to select the choice
that minimizes the regret. The regret is the opportunity loss when one decision is
made instead of the other. The decision is made by selecting the minimum out of the
maximums under each state of nature
The Regret table
Courses of action States of nature
Low demand High demand Maximum
A step by step
introduction
$ 0 -$ 300,000 0
A concentrated
introduction
$ 650,000 $ 0 $ 650000
Probability 0.6 0.4
Under this criterion the optimal course of action will be a step by step introduction
of the new brand of washing machine in to the market.
5. Optimal decision based on Maximum Likelihood Criterion

Under the Maximum Likelihood criterion, the optimal decision is taken by identifies
the state of nature with the highest probability and selection of the option that
maximizes the outcome.
Courses of action States of nature
Occurrence of low
demand
Occurrence of
high demand
Maximum
A Step by step
introduction
$ 50,000 $ 700,000 $ 700,000
A concentrated
introduction
-$ 600,000 $ 1,000,000 $ 1,000,000
Probability 0.6 0.4
The most likely occurrence is the low demand and the profit is maximized when the
product is introduced in a step by step manner. Th optimal decision is therefore to
introduce the new brand of washing machine in a step by step manner.
6. Optimal decision based on the Expected Value Criterion
Under the Expected Value Criterion, the expected outcome under each state of
nature is computed, afterwards, the decision maker selects the option that avails the
maximum expected value.
Courses of
action
States of nature
Occurrence of low
demand
Occurrence of
high demand
Maximum Expected Value
A Step by step
introduction
$ 50,000 $ 700,000 $ 700,000 ¿ ( 0.6∗5000 ) + ( 0.4∗700000 ) =$
A concentrated
introduction
-$ 600,000 $ 1,000,000 $ 1,000,000 ¿ ( 0.6∗−600000 ) + ( 0.4∗100000
Probability 0.6 0.4

The optimal course of action under this criterion is a step by step introduction of the
new brand of washing machine.