Chapter 5 Objectives:

 

  1. Describe the different environments under which operations decisions are made:
    1. Certainty: means relevant parameters such as costs, capacity, and demand have known values.
    2. Risk: means that certain parameters have probabilistic outcomes.
    3. Uncertainty: means that it is impossible to assess the likelihood of various possible future events.
  2. Describe Decision Making under uncertainty:
    1. When no information is made on the various states of nature are, use the four criteria:

                                                               i.      Maximin: Determine the worst possible payoff for each alternative and choose the “best worst”.

                                                             ii.      Maximax: Determine the best possible payoff and choose the alternative with that payoff.

                                                            iii.      Laplace: Determine the average payoff for each alternative and choose the one with the best average.

                                                           iv.      Minimax Regret: Determine the worst regret for each alternative, and chose the one with the “best worst”.

  1. Describe expected monetary value approach:
    1. Determine the expected payoff of each alternative, and chose the alternative that has the best expected payoff.

 

  1. Construct a Decision tree:
  2. Compute Expected Value:
  3. Conduct Sensitivity Analysis: