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210 Applying simulation to decision problems NPV ($m) Probabilities Extend existing plant Replace with new equipment −3 tounder−2 0.05 0.00 −2 tounder−1 0.05 0.05 −1 to under 0 0.15 0.15 0tounder 1 0.29 0.26 1tounder 2 0.22 0.21 2tounder 3 0.14 0.18 3tounder 4 0.10 0.10 4tounder 5 0.00 0.05 (a) Compare the two distributions, and stating any necessary assumptions, determine the option that the management should choose. (b) After the above simulations have been carried out a third possible course of action becomes available. This would involve the movement of some of the company’s operations to a new site. A simulation of this option generated the following probability distribution. Is this option worth considering? NPV ($m) Probability −2 tounder−1 0.05 −1 tounder0 0.05 0tounder1 0.40 1tounder2 0.40 2tounder3 0.04 3tounder4 0.03 4tounder5 0.03 (6) A publisher is considering launching a new magazine for women in the 18–25 years age group. It is thought to be vital to the long-term success of the magazine that its sales should reach break-even point within its first year. When asked to make an estimate of the risk of this target not being achieved, the marketing manager, after some thought, states that she thinks the risk is only about 1 in 10. (a) Sketch out the key features of a risk analysis model which might be appropriate for this estimate and explain how the estimate would be obtained from the model.
Exercises 211 (b) Suppose that your risk analysis model suggests that the risk of not achieving the target is about 1 in 4. Explain why the estimate from the model might differ from the ‘holistic’ estimate of the marketing manager and discuss how the conflict might be resolved.
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Decision Analysis for Management Ju
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Decision Analysis for Management Ju
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To Mary and Josephine, Jamie, Jerom
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viii Contents Chapter 16 The analyt
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x Foreword real problems, and it is
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xii Preface accountancy, where rece
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1 Introduction Complex decisions Im
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The role of decision analysis 3 you
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Applications of decision analysis 5
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Overview of the book 11 and profit.
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References 13 8. Walls, M. R., Mora
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16 How people make decisions involv
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28 Decisions involving multiple obj
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72 Introduction to probability Beca
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74 Introduction to probability prac
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76 Introduction to probability we w
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78 Introduction to probability whet
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80 Introduction to probability give
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82 Introduction to probability prob
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84 Introduction to probability deci
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86 Introduction to probability that
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88 Introduction to probability inte
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90 Introduction to probability subj
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92 Introduction to probability (5)
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94 Introduction to probability (a)
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96 Decision making under uncertaint
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98 Decision making under uncertaint
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100 Decision making under uncertain
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6 Decision trees and influence diag
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Constructing a decision tree 145 be
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Determining the optimal policy 147
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Decision trees and utility 149 succ
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Decision trees involving continuous
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Practical applications of decision
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Assessment of decision structure 15
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Assessment of decision structure 15
Page 175 and 176: Eliciting decision tree representat
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Page 179 and 180: Summary 163 where the resulting dec
Page 181 and 182: Exercises 165 other elements of the
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Page 189 and 190: Exercises 173 why it was rational f
Page 191 and 192: Exercises 175 (11) In the Eagle Mou
Page 193 and 194: References 177 ABC Chemicals are pl
Page 195 and 196: 7 Applying simulation to decision p
Page 197 and 198: Monte Carlo simulation 181 Of cours
Page 199 and 200: Monte Carlo simulation 183 Table 7.
Page 201 and 202: Applying simulation to a decision p
Page 213 and 214: Applying simulation to investment d
Page 221 and 222: Summary 205 Hull 10 ), some of them
Page 223 and 224: Exercises 207 (c) Use your simulati
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Page 229: References 213 6 million Therefore
Page 232 and 233: 216 Revising judgments in the light
Page 263 and 264: 9 Biases in probability assessment
Page 265 and 266: Introduction 249 of people watching
Page 267 and 268: The availability heuristic 251 make
Page 269 and 270: The representativeness heuristic 25
Page 275 and 276: The anchoring and adjustment heuris
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The anchoring and adjustment heuris
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Other judgmental biases 263 Other j
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Is human probability judgment reall
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Exercises 271 Did you receive timel
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References 273 have been taken from
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References 275 18. Hamilton, D. L.
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10 Methods for eliciting probabilit
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Preparing for probability assessmen
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Consistency and coherence checks 28
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Assessment of the validity of proba
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Assessment of the validity of proba
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Assessing probabilities for very ra
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Exercises 293 Odds in favor of even
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References 295 13. Wright, G. and W
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298 Risk and uncertainty management
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310 Decisions involving groups of i
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330 Resource allocation and negotia
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14 Decision framing and cognitive i
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How people frame decisions 357 Figu
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Imposing imaginary constraints and
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Inertia in strategic decision makin
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Studies in the psychological labora
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Overcoming inertia? 369 it is diffi
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Discussion questions 373 frame anal
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References 375 References 1. Luchin
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15 Scenario planning: an alternativ
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Introduction 379 documented in Chap
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Scenario construction: the extreme-
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Using scenarios in decision making
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Using scenarios in decision making
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Scenario construction: the driving
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Case study of a scenario interventi
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Table 15.1 - The components of the
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Illustrative case study 403 (b) Att
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Illustrative case study 405 Stage 4
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Illustrative case study 407 importa
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Conclusion 409 combinations. Often
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References 411 2. Van der Heijden,
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414 The analytic hierarchy process
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17 Alternative decision-support sys
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Expert systems 429 generally agreed
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Expert systems 431 that knowledge e
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Expert systems 433 (1) That the sub
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Expert systems 435 information syst
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Expert systems 437 to focus on ‘t
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Expert systems 439 On the basis of
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Is there any intention/expectation
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Expert systems 443 described above
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Expert systems 445 body of knowledg
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Statistical models of judgment 447
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Comparisons 453 ‘broken leg’ cu
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Some final words of advice 455 Ques
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Some final words of advice 457 of t
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References 459 Table 17.1 - Summary
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References 461 20. Eisenhart, J. (1
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Chapter 3 Suggested answers to sele
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Suggested answers to selected quest
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472 Index Brown, C.E. 446 Brown, S.
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474 Index HIVIEW 58 Hodgkinson, G.P
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476 Index scenario intervention cas
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