Decision Making Tools
P A R T
I V
QUANTITATIVE MODULES
Quantitative Module
Decision-Making Tools
A
Module Outline
THE DECISION PROCESS IN OPERATIONS FUNDAMENTALS OF DECISION MAKING DECISION TABLES TYPES OF DECISION-MAKING ENVIRONMENTS Decision Making Under Uncertainty Decision Making Under Risk Decision Making Under Certainty Expected Value of Perfect Information (EVPI) DECISION TREES A More Complex Decision Tree Using Decision Trees in Ethical Decision Making SUMMARY KEY TERMS USING SOFTWARE FOR DECISION MODELS SOLVED PROBLEMS INTERNET AND STUDENT CD-ROM EXERCISES DISCUSSION QUESTIONS PROBLEMS INTERNET HOMEWORK PROBLEMS CASE STUDIES: TOM TUCKER’S LIVER TRANSPLANT; SKI RIGHT CORP. ADDITIONAL CASE STUDIES BIBLIOGRAPHY
L EARNING O BJECTIVES
When you complete this module you should be able to IDENTIFY OR DEFINE: Decision trees and decision tables Highest monetary value Expected value of perfect information Sequential decisions DESCRIBE OR EXPLAIN: Decision making under risk Decision making under uncertainty Decision making under certainty
674
MODULE A
D E C I S I O N -M A K I N G T O O L S
The wildcatter’s decision was a tough one. Which of his new Kentucky lease areas—Blair East or Blair West—should he drill for oil? A wrong decision in this type of wildcat oil drilling could mean the difference between success and bankruptcy for the company. Talk about decision making under uncertainty and pressure! But using a decision tree, Tomco Oil President Thomas E. Blair identified 74 different options, each with its own potential net profit. What had begun as an overwhelming number of geological, engineering, economic, and political factors now became much clearer. Says Blair, “Decision tree analysis provided us with a systematic way of planning these decisions and clearer insight into the numerous and varied financial outcomes that are possible.”1
“The business executive is by profession a decision maker. Uncertainty is his opponent. Overcoming it is his
I V
QUANTITATIVE MODULES
Quantitative Module
Decision-Making Tools
A
Module Outline
THE DECISION PROCESS IN OPERATIONS FUNDAMENTALS OF DECISION MAKING DECISION TABLES TYPES OF DECISION-MAKING ENVIRONMENTS Decision Making Under Uncertainty Decision Making Under Risk Decision Making Under Certainty Expected Value of Perfect Information (EVPI) DECISION TREES A More Complex Decision Tree Using Decision Trees in Ethical Decision Making SUMMARY KEY TERMS USING SOFTWARE FOR DECISION MODELS SOLVED PROBLEMS INTERNET AND STUDENT CD-ROM EXERCISES DISCUSSION QUESTIONS PROBLEMS INTERNET HOMEWORK PROBLEMS CASE STUDIES: TOM TUCKER’S LIVER TRANSPLANT; SKI RIGHT CORP. ADDITIONAL CASE STUDIES BIBLIOGRAPHY
L EARNING O BJECTIVES
When you complete this module you should be able to IDENTIFY OR DEFINE: Decision trees and decision tables Highest monetary value Expected value of perfect information Sequential decisions DESCRIBE OR EXPLAIN: Decision making under risk Decision making under uncertainty Decision making under certainty
674
MODULE A
D E C I S I O N -M A K I N G T O O L S
The wildcatter’s decision was a tough one. Which of his new Kentucky lease areas—Blair East or Blair West—should he drill for oil? A wrong decision in this type of wildcat oil drilling could mean the difference between success and bankruptcy for the company. Talk about decision making under uncertainty and pressure! But using a decision tree, Tomco Oil President Thomas E. Blair identified 74 different options, each with its own potential net profit. What had begun as an overwhelming number of geological, engineering, economic, and political factors now became much clearer. Says Blair, “Decision tree analysis provided us with a systematic way of planning these decisions and clearer insight into the numerous and varied financial outcomes that are possible.”1
“The business executive is by profession a decision maker. Uncertainty is his opponent. Overcoming it is his
Bibliography: Brown, R. V. “The State of the Art of Decision Analysis.” Interfaces 22, 6 (November–December 1992): 5–14. Collin, Ian. “Scale Management and Risk Assessment for Deepwater Developments.” World Oil 224, no. 5 (May 2003): 62. Hammond, J. S., R. L. Kenney, and H. Raiffa. “The Hidden Traps in Decision Making.” 76, no. 5 Harvard Business Review (September–October 1998): 47–60. Jbuedj, C. “Decision Making under Conditions of Uncertainty.” Journal of Financial Planning (October 1997): 84. Keefer, Donald L. “Balancing Drug Safety and Efficacy for a Go/NoGo Decision.” Interfaces 34, no. 2 (March–April 2004): 113–116. Kirkwood, C. W. “An Overview of Methods for Applied Decision Analysis.” Interfaces 22, 6 (November–December 1992): 28–39. Perdue, Robert K., William J. McAllister, Peter V. King, and Bruce G. Berkey. “Valuation of R and D Projects Using Options Pricing and Decision Analysis Models.” Interfaces 29, 6 (November 1999): 57–74. Raiffa, H. Decision Analysis: Introductory Lectures on Choices Under Certainty. Reading, MA: Addison-Wesley (1968). Render, B., R. M. Stair, Jr., and R. Balakrishnan. Managerial Decision Modeling with Spreadsheets. 2nd ed. Upper Saddle River, NJ: Prentice Hall (2006). Render, B., R. M. Stair Jr., and M. Hanna. Quantitative Analysis for Management, 9th ed. Upper Saddle River, NJ: Prentice Hall (2006). Schlaifer, R. Analysis of Decisions Under Certainty. New York: McGraw-Hill (1969).