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202 visualizações34 páginasDecisions Analysis
Presented By: Afzal Waseem Presented To: Dr. Arnold Yuan
Decisions Analysis
Decision analysis provides a framework and methodology for rational decision making when the outcomes are uncertain
The GOFERBROKE COMPANY owns a tract of land that may contain oil. A consulting geologist has reported to management that she believes there is 1 chance in 4 of oil. Because of this prospect, another oil company has offered to purchase the land for $90,000. However, The GOFERBROKE COMPANY owns a tract of land that may contain oil. A consulting geologist has reported to management that she believes there is 1 chance in 4 of oil. Because of this prospect, another oil company has offered to purchase the land for $90,000. However, Goferbroke is considering holding the land in order to drill for oil itself. The cost of drilling is $100,000. If oil is found, the resulting expected revenue will be $800,000, so the company’s expected profit (after deducting the cost of drilling) will be $700,000. A loss of $100,000 (the drilling cost) will be incurred if the land is dry (no oil)

Jun 09, 2012

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Decisions Analysis
Presented By: Afzal Waseem Presented To: Dr. Arnold Yuan
Decisions Analysis
Decision analysis provides a framework and methodology for rational decision making when the outcomes are uncertain
The GOFERBROKE COMPANY owns a tract of land that may contain oil. A consulting geologist has reported to management that she believes there is 1 chance in 4 of oil. Because of this prospect, another oil company has offered to purchase the land for $90,000. However, The GOFERBROKE COMPANY owns a tract of land that may contain oil. A consulting geologist has reported to management that she believes there is 1 chance in 4 of oil. Because of this prospect, another oil company has offered to purchase the land for $90,000. However, Goferbroke is considering holding the land in order to drill for oil itself. The cost of drilling is $100,000. If oil is found, the resulting expected revenue will be $800,000, so the company’s expected profit (after deducting the cost of drilling) will be $700,000. A loss of $100,000 (the drilling cost) will be incurred if the land is dry (no oil)

Attribution Non-Commercial (BY-NC)

202 visualizações

Decisions Analysis
Presented By: Afzal Waseem Presented To: Dr. Arnold Yuan
Decisions Analysis
Decision analysis provides a framework and methodology for rational decision making when the outcomes are uncertain
The GOFERBROKE COMPANY owns a tract of land that may contain oil. A consulting geologist has reported to management that she believes there is 1 chance in 4 of oil. Because of this prospect, another oil company has offered to purchase the land for $90,000. However, The GOFERBROKE COMPANY owns a tract of land that may contain oil. A consulting geologist has reported to management that she believes there is 1 chance in 4 of oil. Because of this prospect, another oil company has offered to purchase the land for $90,000. However, Goferbroke is considering holding the land in order to drill for oil itself. The cost of drilling is $100,000. If oil is found, the resulting expected revenue will be $800,000, so the company’s expected profit (after deducting the cost of drilling) will be $700,000. A loss of $100,000 (the drilling cost) will be incurred if the land is dry (no oil)

Attribution Non-Commercial (BY-NC)

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Decisions Analysis

Decision analysis provides a framework and methodology for rational decision making when the outcomes are uncertain

A PROTOTYPE EXAMPLE

The GOFERBROKE COMPANY owns a tract of land that may contain oil. A consulting geologist has reported to management that she believes there is 1 chance in 4 of oil. Because of this prospect, another oil company has offered to purchase the land for $90,000. However, Goferbroke is considering holding the land in order to drill for oil itself. The cost of drilling is $100,000. If oil is found, the resulting expected revenue will be $800,000, so the companys expected profit (after deducting the cost of drilling) will be $700,000. A loss of $100,000 (the drilling cost) will be incurred if the land is dry (no oil)

For each possible action, find the minimum payoff over all possible states of nature. Next, find the maximum of these minimum payoffs. Choose the action whose minimum payoff Gives this maximum.

Disadvantages

Pessimistic view point Best guaranteed payoff The action which provides the best payoff with its worst state of nature.

Nature is not a malevolent opponent, This is especially true when the worst possible Payoff from an action comes from a relatively Unlikely state of nature

Does not include the effect of prior probabilities it in

Maximum likelihood criterion: Identify the most likely state of nature (the one with the largest prior probability). For this state of nature, find the action with the maximum payoff. Choose this action.

No state of nature is considered other than the most likely one In a problem with many possible states of nature, the probability of the most likely one may be quite small, so focusing on just this one state of nature is quite unwarranted Ignores the extremely attractive payoff of 700 if the company drills and finds oil.

1. Using the best available estimates of the probabilities of the respective states of nature (currently the prior probabilities), 2. Calculate the expected value of the payoff for each of the possible actions. 3. Choose the action with the maximum expected payoff

It incorporates all the available information 1. Payoffs 2. Prior Probabilities of states of nature

It is sometimes argued that these estimates of the probabilities necessarily are largely subjective and so are too shaky to be trusted. There is no accurate way of predicting the future, including a future state of nature, even in probability terms

To assess the effect of possible inaccuracies in THE PRIOR PROBABILITIES, it often is helpful to conduct sensitivity analysis

To study the effect if some of the numbers included in the mathematical model are not correct 1. most questionable are the prior probabilities 2. similar approach could be applied to the payoffs

GOFERBROKES MANAGEMENT true prior probability 1. Oil 0.15 to 0.35 2. Dry 0.85 to 0.65 sum of the two prior probabilities must equal 1

Application of Bayes decision rule twice Oil = 0.15 Dry = 0.85 Expected payoff (Selling) = 90 Expected Payoff (Drill) = 20 Oil = 0.35 Dry = 0.65 Expected Payoff (Drill) = 180 Expected payoff (Selling) = 90 DRILL

SELL

Oil p = 0.15 Expected Payoff (Drill) = 20 Dry = 0.85 Expected payoff (Selling) = 90

0.15 - 0.35

Oil p = 0.35 Expected Payoff (Drill) = 180 Dry = 0.65 Expected payoff (Selling) = 90

With more than two lines, there might be more than one crossover point where the decision shifts from one alternative to another

Frequently, additional testing (experimentation) can be done to improve the preliminary estimates of the probabilities of the respective states of nature provided by the prior probabilities. These Improved estimates are called posterior probabilities

1) how to derive the posterior probabilities !!! 2) how to decide whether to conduct experimentation or not !!!

Test Results

DRY

OIL

Bayes theorem

e.g 0.25 and 0.75 are the prior probabilities here

Expected Payoff`s

1. Expected Value of Perfect Information 2. Expected Value of Experimentation

The first method assumes (unrealistically) that the experiment will remove all uncertainty about what the true state of nature is, and then this method makes a very quick calculation of what the resulting improvement in the expected payoff would be (ignoring the cost of the experiment). This quantity, called the expected value of perfect information.

Since 142.5 far exceeds 30, the cost of experimentation (a seismic survey), it may be worthwhile to proceed with the seismic survey. To find out for sure, we now go to the second method of evaluating the potential benefit of experimentation

find all the posterior probabilities excluding the cost of the experiment

Chance fork

Decision Fork

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