IEOR 166 Spring 2012 Course Title: Class Meetings: Lectures: Sections: Decision Analysis

Professor Shmuel S. Oren E-mail: OREN@IEOR.Berkeley.edu

Le conte 3 Monday and Wednesday 11:00 12:00PM Le Conte 3 Friday 11:00 12:00PM Professor Shmuel S. Oren 4135 Etcheverry Hall Monday 12:30 1:30PM, or by appointment 2-1836

Lecturer: Office Hours: Phone:

GSI: Ruoyang Li Office Hours: TBA Email: ruoyang@berkeley.edu Textbook: Reader (obtain from Vicks Copy 1879 Euclid Av.) Additional References: Ronald Howard and James Matheson The Principles and Application of Decision Analysis, Published by Strategic Decisions Group, 3000 Sand Hill Rd., Menlo Park California 94025 Robert Clemen, Making Hard Decisions, Duxbury Press, Belmont California. Prerequisites: A basic course in Probability (134, 172 or equivalent), A basic course in Calculus. Homework: Midterm I Midterm II Final 15% (can work in pairs and submit two copies) 25%H+15%L 45%

Grading Policy:

Exam dates: Midterm 1: Midterm 2: Final :

March 2, 2012 April 6, 2012 Tuesday May 8, 2011 7-10PM

All exams are closed book. 1 sheet allowed per exam (as well as the previous sheets) Website: https://bspace.berkeley.edu

Course Outline
Introduction - Thumbtack game and other examples (hand outs) General discussion of decision problems and ways to approach them. How to bring creativity, knowledge and values (economic as well as ethical considerations) into the decision making process in a rational and consistent manner. (News clips and examples) The Decision Analysis cycle: (papers No 1 and 2 from reader by Howard and Matheson) Basic concepts and tools (Reader - Oliver and Marshal Chapt. 1) Decision trees Influence diagrams Profit lotteries Single-stage decision problems with discrete and continuous decision space (Reader Oliver and Marshal Chapt. 2) Multistage decision problems (Reader Oliver and Marshal Chapt. 3&4) Forecasting and expected value of perfect information (Reader Oliver and Marshal Chapt. 3) Using Bayes' rule and value of imperfect information Problem formulation using influence diagrams and decision trees (Reader Oliver and Marshal Chapt. 4 and paper on The decision to Seed Huricanes) Sensitivity analysis (deterministic and stochastic) (Reader Oliver and Marshal Chapt. 5) Using computer software for Decision Analysis (DATA by TREEAGE CO.) Utility theory: (Reader - paper by Howard on Risk Preference) Axioms of utility theory Assessments of utility functions Risk sensitivity and its measures Exponential utility functions; The "Delta" property and constant risk aversion Multiattribute decision problems (Reader Oliver and Marshal Sec.. 7.1-7.6 and Clemen Chapt. 16) Identifying and quantifying decision attributes including ethical considerations and intangibles such as human life. Dealing with conflicting attributes; identifying conflicts and agreement, non inferior frontier approach Additive utility functions with constant tradeoffs Preferential independence, utility independence and additive independence Simple multiattribute utility functions. Assessment of subjective probability (Reader - paper by Karl Spetzler) and Matheson)Assessment techniques, biases and how to avoid them. Multiperiod decision problems (Reader - Note by Oren and paper by James Smith) Time preference, multiattribute approach Discounted present value Banker-Broker approach