MAB_J6

LDR 5301, Methods of Analysis for Business Operations 1

Course Learning Outcomes for Unit VI Upon completion of this unit, students should be able to:

5. Determine the criteria for making decisions under organizational uncertainty. 5.1 Describe the five steps in decision-tree analysis. 5.2 Justify a decision using decision-tree analysis.

6. Summarize the various methods of decision-making under risk.

6.1 Develop a decision-making tree with nodes, and states of nature. 6.2 Compute the state of probabilities for different alternatives in a scenario.

Course/Unit

Learning Outcomes Learning Activity

5.1

Unit Lesson Chapter 3, pp. 77–85 Video Segment: Developing Alternatives and Considering Their

Consequences Article: “Experimental Consideration of Preference in Decision Making Under

Certainty” Unit VI Case Study

5.2

Unit Lesson Chapter 3, pp 77–85 Video Segment: Developing Alternatives and Considering Their

Consequences Article: “Experimental Consideration of Preference in Decision Making Under

Certainty” Unit VI Case Study

6.1

Unit Lesson Chapter 3, pp. 77–85 Video Segment: Developing Alternatives and Considering Their

Consequences Article: “Experimental Consideration of Preference in Decision Making Under

Certainty” Unit VI Case Study

6.2 Unit Lesson Chapter 3, pp. 77–85 Unit VI Case Study

Required Unit Resources Chapter 3: Decision Analysis, pp. 77–85 In order to access the following resources, click the links below. Advanced Knowledge (Producer). (1999). Developing alternatives and considering their consequences

(Segment 5 of 8) [Video]. In The Cuban Missile Crisis: A case study in decision making and its consequences. Films on Demand. https://libraryresources.columbiasouthern.edu/login?auth=CAS&url=https://fod.infobase.com/PortalPl aylists.aspx?wID=273866&xtid=53321&loid=240000

UNIT VI STUDY GUIDE Decision-Making Under Certainty and Uncertainty

LDR 5301, Methods of Analysis for Business Operations 2

UNIT x STUDY GUIDE Title

The transcript for this video can be found by clicking on “Transcript” in the gray bar to the right of the video in the Films on Demand database. . Corner, J. L., & Buchanan, J. T. (1995, June). Experimental consideration of preference in decision making

under certainty. Journal of Multi-Criteria Decision Analysis, 4(2), 107–121. https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direc t=true&db=bsu&AN=17649160&site=ehost-live&scope=site

Unit Lesson

Introduction Leaders of all kinds—economists, Wall Street hedge fund managers, chief executive officers (CEOs) of Fortune 500 companies, presidents, generals, NCAA coaches, major league coaches—all analyze data to make improvements. In Pat Riley’s book, The Winner Within (1993), he discusses winning multiple championships as the coach of the Los Angeles Lakers. Part of winning was not only having great players, but also analyzing the data on their production on the court during the game. This means their shooting percentages from areas of the court (Were points scored? Was the shot missed? Was the shot blocked?), how many times they would drive to the lane and score, and their free throw percentages. This demonstrates that data crunching is important. Let’s put ourselves in the position of Pat Riley as he was coaching the Los Angeles Lakers. His team had a very important and critical game—Game 7 of the Finals championship. Therefore, Riley and his assistant coaches reviewed the hard data recorded from the previous Game 6 results and the data from Games 1 through 5. Why? They were looking for trends in each player. They were looking for correlation. They were looking at the probability of the success of certain plays. They were looking at where the players’ points were scored from and what offensive play was used, as well as what defensive strategy was used against them. Coach Riley, in fact, used all these same processes as general manager of the Miami Heat NBA basketball team. In 2008, Pat Riley stepped down as head coach of the Miami Heat to become the president of the team. Riley selected Eric Spoelstra as the new head coach. By naming Spoelstra as head coach, Riley said that it was important to bring in new coaches with technical skills and fresh, innovative ideas (National Basketball Association, 2008). Spoelstra started his career in the video coordination department. He was in charge of four people who analyzed video from each Miami Heat game (National Basketball Association, 2008). Spoelstra and his staff analyzed exactly what was discussed above and provided Riley and his staff not only hard data, but video analysis replay to support the data to make decisions on plays and players for each game. Coach Spoelstra became a master of the trade of video analysis, and he was able to integrate and comprehend the importance of data in decision-making when he became coach. What, then, is the outcome of all this effort? Decisions. Decisions on what players to play in Game 7 of the final championship; what offensive plays to select that have high probability of scoring points; what defensive alignments to take against the opposition; and what players to have on the court during each period of the game. Even a player’s fatigue can be analyzed by their offensive and defensive play. As you can see, there are many decisions to be made. These decisions by the head coach and staff led to using a decision-tree model and the five-step process in the form of basketball analytics. We will delve more into these topics in this unit.

LDR 5301, Methods of Analysis for Business Operations 3

UNIT x STUDY GUIDE Title

Decision Trees

Figure 1 is the basic framework of a decision tree. Using a decision tree is an easy way to outline the information you have at hand. Examples of what you might analyze include whether to manufacture or buy parts for your product or to manufacture or outsource parts for your product. When these are outlined along the states of nature, probabilities can be assigned with profit and losses computed for each state of nature. The decision tree is designed to outline and frame decision problems with a comparison between two choices or multiple choices. The tree is composed of a decision node (square) followed by the directive

actions that are under evaluation/consideration: Examples of these actions might be build, buy, outsource, or do. These lead to a state of nature (the circles) that are numbered as alternatives to consider, which then again branch off into choices like favorable or unfavorable. According to Render et al. (2018, p. 77) the following are the steps for the decision tree.

As you can see, the decision-tree analysis steps resemble the six steps of decision-making that we have previously covered. Let’s look at Figure 3.2, Thompson’s Decision Tree, from page 77 of the textbook (below). It is composed of decision nodes and state of decision nodes. The decision node is what the problem is based on your first decision point, which is usually:

• Select Option A, • Select Option B, or

Figure 1: Decision Tree Framework (Render, et al., 2018)

LDR 5301, Methods of Analysis for Business Operations 4

UNIT x STUDY GUIDE Title

• Do nothing (or choose another option if there are others).

It is from this initial point that your decision tree begins to branch out. From the figure, there are three choices: construct large plant, construct small plant, or do nothing. These three branches lead to your state of nature nodes, which usually assign a probability factor along with a cost to each assigned factor. Usually, these nodes will have favorable, unfavorable with an assigned cost value, or profit revenue generated. As you can see in Figures 3.3, 3.4, and 3.5 in the textbook, the assigned problems provide the data for you. For Figure 3.5, walk through the example beginning on page 80 of your textbook. You will be able to correlate the EMV from the problem to the figure. This is the final step of the process if computing the information in the decision tree (See the computations below Figure 3.5). The EMV is found by multiplying monetary values by their probabilities (Render et al., 2018). Look again at Figure 3.5 in the textbook, walk through the content in the textbook, and match the decision tree state-of-nature nodes to the numbers and data provided. The key point of this exercise is to begin to build the math formula to solve the problem. Place the alternatives off the corresponding nodes, and compute the probabilities and values. Finally, compute the EMV. In this unit, we examined how valuable decision trees can be in solving complex problems. You may think you would never use this format. However, you should never say never. Look at the content in this unit as gained knowledge of a process to make a decision based on costs, time, and return on investment. You never know when your boss will look at you and say he needs you to run a market survey for the company based on public opinion about whether or not a chemical plant should be opened in Union County. He needs to know the results and probabilities based on favorable and unfavorable decisions regarding the outcomes, costs, and risks. You can, hopefully, now see the power of this lesson. You are armed and ready to take on the challenge from your boss. You know how to set up a decision-tree analysis using the five steps, and how to determine the efficiency of the operations in question.

Thompson’s Decision Tree (Render et al., 2018)

LDR 5301, Methods of Analysis for Business Operations 5

UNIT x STUDY GUIDE Title

References National Basketball Association. (2008, April 28). Riley Steps Down, Spoelstra Named Head Coach. NBA.

https://www.nba.com/heat/news/rileyspoelstra080428html Render, B., Stair, R. M., Jr., Hanna, M. E., & Hale, T. S. (2018). Quantitative analysis for management (13th

ed.). Pearson. https://online.vitalsource.com/#/books/9780134518558 Riley, P. (1993). The winner within: A life plan for team players. Berkley Publishing Group. Learning Activities (Nongraded) Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit them. If you have questions, contact your instructor for further guidance and information. For an overview of the chapter equations, review the Key Equations on page 92 of the textbook. Then, review solved problems 3–1 (page 92) and Problem 3–3 (page 95) to get a better understanding of the math presented in this unit.