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DecisionTheoryTheDecisionProcessSpecifyobjectivesandcriteriaformakingdecisionsDevelopalternativesAnalyzeandcomparealternativesSelectthebestalternativeImplementthechosenalternativeMonitortheresultstoensurethatdesiredresultsareachievedCausesofPoorDecisionsMistakesinthedecisionprocessBoundedrationalitySuboptimizationDecisionEnvironmentsCertaintyRiskUncertaintyDecisionTheory–representsageneralapproachtodecisionmakingandsuitableforawiderangeofoperationsmanagementdecision(e.g.capacityplanning,productandservicedesign,equipmentselection,andlocationplanning)DecisionTheoryissuitablefordecisionscharacterizedby:asetoffutureconditionsexiststhatwillhaveabearingontheresultofthedecisionalistofalternativesforthemanagerstochoosefromaknownpayoffforeachalternativeundereachpossiblefutureconditionTousethisapproach(DecisionTheory),themanagermust:identifythefutureconditionsdevelopalistofpossiblealternativesdetermine/estimatethepayoffassociatedwitheachalternativeifpossible,estimatethelikelihoodofeachpossiblefutureconditionevaluatealternativesaccordingtosomedecisioncriterionEvaluationofAlternativesDependsontheDegreeofCertaintyAssociatedwiththeFutureConditionDecisionMakingUnderCertainty(knownfutureconditions)DecisionMakingUnderUncertainty(noinfoonhowlikelyfutureconditionswillbe)MaximinMaximaxLaplaceMinimaxRegretDecisionMakingUnderRisk(thelikelihoodofeachfutureoutcomeisknown)ExpectedMonetaryValuecriterion(EMV)ExpectedValueofPerfectInformation(EVPI)DecisionTreesSensitivityAnalysisProblems:1–DMunderuncertainty2–DMunderrisk,EVPI,decisiontree3–Sensitivityanalysis4–DMunderrisk,EVPI,anddecisiontreeProblem1(209)Asmallbuildingcontractorhasrecentlyexperiencedtwosuccessiveyearsinwhichworkopportunitiesexceededthefirm’scapacity.Thecontractormustnowmakeadecisiononcapacityfornextyear.Estimatedprofitsundereachofthetwopossiblestatesofnatureareasshowninthetablebelow.Whichalternativeshouldbeselectedifthedecisioncriterionis:(a)Maximax?(b)Maximi