What is Business Analytics and why it is useful for businesses today?

• Considerable overlap with:

• Operations Research

• Management Science

• Decision Science

A few real-world cases can illustrate its usefulness.

Characteristics and benefits of modelling

What is model?

What are the types of models:

• Mental (arranging furniture)

• Visual (blueprints, road maps)

• Physical/Scale (aerodynamics, buildings)

• Mathematical (what we’ll be studying)

What is the characteristics of a model?

• A simplified versions of things they represent

• A valid model accurately represents the relevant characteristics of the object or decision problem being studied.

What is the benefits / advantage of modelling?

• Economy — Less expensive and disruptive than experimenting with real world system

• Feasibility — Used to do things that would be impossible in reality.

• Timeliness — Models can reduce the time taken to make decisions

• Insight & understanding —
• Models enable us to ask ‘what if’ questions and test the sensitivity of particular values

• Models force a consistent, systematic approach to a problem

• Models require managers to be specific about constraints and goals.

What is the disadvantage of modelling?

• May be expensive to develop and test

• May be misused and misunderstood because of their complexity

• Models may down play the value of non-quantifiable information

• May oversimplify the variables of the real world

Discuss the modelling approach to decision making

Categories of Mathematical Models

How do you use a model?

• Don’t accept an answer without further analysis and questioning.

• A mathematical model is only one of a number of tools for decision making.

• If the answer is unacceptable, the reasons for unacceptability should be spelled out and incorporated in a modified model. - An acceptable answer is only an option.

• By successive questioning of the answers and altering the model, it is possible to clarify the options available and obtain a greater understanding of what is possible in a real situation.

Discuss the problem solving framework for leveraging business opportunities

What is the problem solving framework?

What is Psychology of Decision Making?

• Models can be used for structural aspects of decision problems.

• Other aspects cannot be structured easily, requiring intuition and judgment.

• Caution: Human judgment and intuition are not always rational!

• Errors in human judgment often arise because of anchoring and framing effects associated with decision problems.

Anchoring effect

Framing Effects

• Refers to how decision-makers view a problem from a win-loss perspective.

• The way a problem is framed often influences choices in irrational ways...

Example 1:

Example 2:

A structured, modelling approach to decision making helps us make good decisions, but can’t guarantee good outcomes

1. Understand the problem.

2. Identify the decision variables.
X_1 =number of Aqua-Spas to produce
X_2 =number of Hydro-Luxes to produce

3. State the objective function as a linear combination of the decision variables
MAX: 350X 1 + 300X 2

1. State the constraints as linear combinations of the decision variables

1. Identify any upper or lower bounds on the decision variables.
X1 >= 0 && X2 >= 0

Solving LP problems using graphical approach