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MCDM
Analytic Hierarchy Process
Affinity
Diagram
Secondary Braking Dist Turning Radius Purchase Cos t Maint Cost Gas Mileage Time 0-60
Criteria
For instance I strongly favor banana to apple then I give mark lik
No of comparisons
Number of things 1 2 3 4 5 6 7
Number of
comparisons 0 1 3 6 10 15 21 ?
Priority vectors-( Eigen value and Eigen
vector)
Consistency
max is calculated by
with the priority weight
multiplying the column total of reciprocal matrix
max
n
• Use test statistic:
C.I. Consistency Index
n 1
(1)
Purchase Cost to Maintenance Cost
Compar
e
– Which is more important?
Say purchase cost
– By how much? Say moderately
3
Example - Pairwise Comparisons
(2) Compare Purchase Cost to Gas Mileage
P 1 3 5
M 1/3 1 3
G 1/5 1/3 1
1
• Identify the problem.
2
• Specify the objectives and criteria for solution.
3
• Develop suitable alternatives.
4
• Analyze and compare alternatives.
5
• Select the best alternative.
6
• Implement the solution.
7
• Monitor to see that desired result is achieved.
DECESION MAKING ENVIRONMENT
Decisions are made under three types of
Environment.
Set of
future
conditions
Decision
Making
Known
payoff List of
alternatives alternatives
The information for a decision is often
summarized in a payoff table.
Payoff Table
Table showing the expected payoffs for each
alternative in every possible state of nature.
Payoff Table:
POSSIBLE FUTURE
DEMAND
Alternatives Low Moderate High
Small Facility $10* $10 $10
Medium Facility 7 12 12
Large Facility (4) 2 16
*Present value in $ millions.
Causes for Poor Decisions
Bounded Rationality
Suboptimization
Bounded Rationality
Limitations on decision making caused by costs,
human abilities, time, technology, and availability of
information.
Environment at
which certain
future events have
probable
outcomes. Risk
Decision Making Under Certainty
Laplace
Choose the alternative with the best average period
of any of the alternatives.
Maximin
Choose the alternative with the best of the worst
possible payoff.
Minmax regret
Choose the alternative that has the least of worst
regrets.
Hurwicz
Choose the alternative that has in between most
optimistic and most pessimistic
Decision Making Under Uncertainty
POSSIBLE FUTURE
DEMAND
Alternatives Low Moderate High
Small Facility $10* $10 $10
Medium Facility 7 12 12
Large Facility (4) 2 16
*Present value in $ millions.
Using the laplace approach what will we choose?
EMV
Determine the expected payoff
of each alternative, and choose
the alternative that has the
best expected payoff
This approach is most
appropriate when the decision
maker is neither risk averse nor
risk seeking
Decision Making Under Risk
POSSIBLE FUTURE
DEMAND
Alternatives Low Moderate High
Small Facility $10* $10 $10
Medium Facility 7 12 12
Large Facility (4) 2 16
*Present value in $ millions.
Using the EMV criterion, identify the best alternative for these
probabilities: low=.30,moderate=.50 and high=.20.
EVSmall = .30($10)+.50($10)+.20($10) = $10
EVMedium = .30($7) +.50($12)+.20($12) = $10.5
EVLarge = .30($-4) +.50($2) +.20($16) = $3
Expected Expected
Payoff Payoff
EVPI
Under Under
Certainty Risk
or
Expected Value of Perfect Information (EVPI)
(Using the first method)
E.O.L. 50 35 27.5 30 45
10 0.10 200 20
11 0.15 220 33
12 0.20 240 48
13 0.25 260 65
14 0.30 280 84
EPPI = 250
= min E.O.L.
Workout 2
Workout 3
Under an employment promotion program, it is proposed to
allow sale of newspapers on the buses during off peak hours.
The vendor can purchase the newspaper at a special
concessional rate of 25 paise per copy against the selling price
of 40 paise. Any unsold copies are, however a dead loss. A
vendor has estimated the following probability distribution for
theofno.
No. of copies
copies 15 demanded:
16 17 18 19 20
Probability 0.04 0.19 0.33 0.26 0.11 0.07
Go to Business School
Is this a realistic model?
Utility Function
Expand Factory
Cost = $1.5 M 60% Chance Bad Economy
Profit = $2M
Good Economy (40%)
Profit = $3M
Don’t Expand Factory
Cost = $0 Bad Economy (60%)
Profit = $1M
Build Large
Low Demand .4($50) = $20
High Demand .6($70) = $42
______________________________________________________________________
Build Small
$16 + $33 = $49
Build Large
$20 + $42 = $62