Created date
Aug 5, 2022 01:07 AM
Decision Making
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What is Business Analytics and why it is useful for businesses today?

A field of study that uses computers, statistics, and mathematics to solve business problems.
  • Considerable overlap with:
  • Operations Research
  • Management Science
  • Decision Science

A few real-world cases can illustrate its usefulness.

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Characteristics and benefits of modelling

What is model?

A structure which has been built purposely to exhibit features and characteristics of some other objects. Everyone uses models to make decisions.
A more formal definition is a device which behaves approximately like part of the real world:
  • Train-sets, dolls, toy prams...
  • Small aircraft replicas in wind tunnels...
  • Sponge-rubber men used in car crash...
  • The solar system as a number of small balls moving in ellipses round a larger ball...

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

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Most spreadsheet models are very similar to our generic mathematical model:
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Categories of Mathematical Models

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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?

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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

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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:
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Example 2:
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A structured, modelling approach to decision making helps us make good decisions, but can’t guarantee good outcomes

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A good decision is one that harmonizes
  • What we can do
  • What we know
  • What we want
And to which we are committed
  1. Understand the problem.
  1. Identify the decision variables.
    1. X_1 =number of Aqua-Spas to produce
      X_2 =number of Hydro-Luxes to produce
  1. State the objective function as a linear combination of the decision variables
    1. MAX: 350X 1 + 300X 2
  1. State the constraints as linear combinations of the decision variables
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  1. Identify any upper or lower bounds on the decision variables.
    1. X1 >= 0 && X2 >= 0
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Solving LP problems using graphical approach

FIT3158 Note - W1 Explore the use of linear programming (LP) in solving optimisation problemsFIT3158 Note - W1 Linear programming