Rendy Franata 29116117 YP 55 B

Summary of Decision Analysis for Management

Judgment Third Edition (Chapter 6, 8 and 9)

Decision trees and influence diagrams are very useful for

people to help gaining an understanding of the structure of the
problems, which is confronted by them. The decision problems are
multi-stage in character when the choice of a given option may
result in circumstance, which will require yet another decision to be
made. It means that when we made an initial decision, we also have
to prepare the later decision to avoid the bad possibilities might be
happened. The decision trees can help a decision maker to develop
a clear view of the structure of a problem and make it easier to
determine the possible scenarios to solve the problems. By doing
this method lead us to be creative thinking and generate new
options. Decision trees model are such as simplifications of the real
problems. Next the influence diagrams used as a key technique to
facilitate decision structuring, because the influence diagrams offer
an alternative way of structuring a complex decision problem and
some analyst find that people relate to them much more easily.
Constructing a Decision Tree A square is used to represent a
decision node and each branch emanating from this node presents
an option, which will be the decision maker choice. A circle is used
to represent a chance node; the amount of all chance must be
100%. In the decision problem, in a simple approach there are only
two possible outcomes for each course of action, namely success
and failure.
A decision tree consists of a set of policies, which is a plan for the
next option when our choice reached under the policy. The
technique for determining the optimal policy is known as the
rollback method. To apply this method, we analyze the tree from the
right to the left by considering the later decision first. The rollback
method allows a complex decision problem to be analyzed as a
series of smaller decision problems.
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There are many benefits from using the decision trees analysis, but
some decision analyst counsel against using it too early in the
decision process. A decision maker should better have wide range
information to create a broad perspective and make simplification
model of multi-stage problems, so that the decision maker can
understand clearly all the possibilities might be happened and can
make prevention or the next planning in facing all the those
possibilities might raised.

Revising judgments in the light of information

In Bayes Theorem, the initial decision makers probability
estimation, which based only on his own knowledge, is called as
prior probability. Next, in the light of new information, Bayes
Theorem is used to modify the prior probability, and then called as
posterior probability. This theorem develops the idea intuitively and
then shows how a probability tree can be used to revise prior
probabilities.

The steps in the process of applying Bayes Theorem:

Construct a tree with branches that represents all the possible
events, which can occur and write the prior probabilities for
these events on the branches.
Extend the tree by attaching to each branch a new branch,
which represents the new information, which you have obtained.
On each branch write the conditional probability of obtaining this
information given the circumstance represented by the
preceding branch.
Obtain the joint probabilities by multiplying each prior probability
by the conditional probability, which follows it on the tree.
Sum the joint probabilities.
Divide the appropriate joint probability by the sum of the joint
probabilities to obtain the required posterior probability.

Assessing the value of new information

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The presences of new information give a potential benefit that can

reduce even remove the uncertainty involved in a decision and
thereby increase the expected payoff. Decision makers who are not
confident with the initial estimate can gain much more new
information to revise the prior possibility to the posterior possibility,
and then analyze it till the decision process is very reliable.
The expected value of perfect information (EVPI) can be act as a
useful screen to measure of the maximum amount that it would be
worth paying for information. Calculating the expected value of
imperfect information was seen to be a more involved process,
because the decision maker also has to judge the reliability of the
information. Because of this, we stressed the importance of
sensitivity analysis, which allows the decision maker to study the
effect of changes in these assessments.

Biases in probability assessment

Since long time ago, in a process of decision making it must require
an initial estimate or probability for the possible outcome of the
decision. Because the unavailability of statistical data for used as
the guidance, so it usually leads to the subjective estimates based
on human judgment.

The availability heuristic

People using the availability heuristic because judge the probability
of the occurrence of events by how easily these events are brought
to the mind. Availability can be a reliable heuristic. The recent, latest
or frequently occurring events are usually easier to recall and
assigned high probabilities and estimates for them should be
reliable. The events, which are less available to the mind, are
assumed to be less likely. However, the easily recalled or imagined
events sometimes has no relationship to the true probability of the
event occurring and can lead to biased estimates.
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The representativeness heuristic

People using representativeness heuristic because judge the
probability of the occurrence events by a person or object belong to
a particular category or process. The assessment using the
representativeness heuristic is by judging how representative the
object; person or event is of the category or process.

Finally, in assessing a subjective probability we can use a references

class or the previous forecast which similar to the current events we
need to forecast. If the result is not to do a repetitive forecast such
the past event, we should consider whether there is a historic or
relative frequency reference class that we could use. If all of those
(reference class, previous forecast and historic) are not obvious, we
must be aware cause the only assessment way is by using
judgmental heuristic (heuristic can lead to bias).