BBA 3008

DECISION ANALYSIS

KHOO YU TING

921227015896

200080

MR. LOH YONG CHIANG

February 2014
 TOPIC PAGES

1 Contents 1

2. Define Decision Tree 2-3

3 Certainty and uncertainty in decision-making 4-5

environment

4 Principal step of decision analysis 6-8

5 Construct a decision tree step-by-step 9-11

6 Benefit of using decision analysis 12-14

7 Reference 15

Coursework
8 16-20

TABLE OF CONTENT

Page 1 of 22
2.0 Define Decision Tree

A decision tree is a decision support tool that uses a tree-like graph or model of

decisions and their possible consequences, including chance event outcomes, resource

costs, and utility. It is one way to display an algorithm.

Decision trees are commonly used in operations research, specifically in decision

analysis, to help identify a strategy most likely to reach a goal.

A decision tree is a graph that uses a branching method to illustrate every possible

outcome of a decision.

There are many technical definitions of a decision tree is, you may also use decision

trees for many different types of processes or in different industries. The simplest

definition of a decision tree is that it is an analysis diagram, which can help aid

decision makers, when deciding between different options, by projecting possible

outcomes. The decision tree, gives the decision maker an overview of the multiple

stages by that will follow each possible decision. Each branch shows the probability

of the outcome.

Decision trees can be drawn by hand or created with a graphics program or

specialized software. Informally, decision trees are useful for focusing discussion

when a group must make a decision. Programmatically, they can be used to assign

monetary/time or other values to possible outcomes so that decisions can be

automated. Decision tree software is used in data mining to simplify complex

strategic challenges and evaluate the cost-effectiveness of research and business

decisions. Variables in a decision tree are usually represented by circles.

Page 2 of 22
Heres a simple example: An email management decision tree might begin with a box

labelled Receive new message. From that, one branch leading off might lead to

Requires immediate response. From there, a Yes box leads to a single decision:

Respond. A No box leads to Will take less than three minutes to answer or

Will take more than three minutes to answer. From the first box, a box leads to

Respond and from the second box, a branch leads to Mark as task and assign

priority. The branches might converge after that to Email responded to? File or

delete message.

3.0 Certainty and uncertainty in decision-making environment

Page 3 of 22
There are fads and fashions in the treatment of scientific problems and in the

terminology of the scientific language.

What praxeology calls choosing is nowadays, as far as it concerns the choice of

means, called decision-making. The neologism is designed to divert attention from the

fact that what matters is not simply to make a choice, but to make the best possible

choice. This means: to proceed in such a way that no less urgently desired end should

be satisfied if its satisfaction prevents the attainment of a more urgently desired end.

In the production processes directed in the market economy by profit-seeking

business this is accomplished as far as possible with the intellectual aid of economic

calculation. In a self-sufficient, closed, socialist system, which cannot resort to any

economic calculation, the making of decisions concerning means is mere gambling.

1. Certainty:

A decision environment in which the results of selecting each alternative are known

before the decision is made. In this type of decision making environment, there is only

one type of event that can take place. It is very difficult to find complete certainty in

most of the business decisions. However, in many routine type of decisions, almost

complete certainty can be noticed. These decisions, generally, are of very little

significance to the success of business.

2. Uncertainty:

Page 4 of 22
A decision environment in which the decision maker does not know what outcome

will occur when an alternative is selected. In the environment of uncertainty, more

than one type of event can take place and the decision maker is completely in dark

regarding the event that is likely to take place. The decision maker is not in a position,

even to assign the probabilities of happening of the events.

Such situations generally arise in cases where happening of the event is determined by

external factors. For example, demand for the product, moves of competitors, etc. are

the factors that involve uncertainty.

3. Risk:

Under the condition of risk, there are more than one possible events that can take

place. However, the decision maker has adequate information to assign probability to

the happening or non- happening of each possible event. Such information is

generally based on the past experience.

Virtually, every decision in a modern business enterprise is based on interplay of a

number of factors. New tools of analysis of such decision making situations are being

developed. These tools include risk analysis, decision trees and preference theory.

Modern information systems help in using these techniques for decision making under

conditions of uncertainty and risk.

4.0 Principle step of decision analysis

Page 5 of 22
Decision analysis is a quantitative evaluation of the outcomes that result from a set of

choices in a specific clinical situation. With the exception of the word quantitative,

this definition is no different from the clinical decision making process conducted by

clinicians every day. When faced with a particular problem, clinicians develop an

array of possible actions ranging from doing nothing, to obtaining more information

by performing diagnostic tests, to recommending various therapeutic strategies. This

process is often implicit and occurs in the context of internal algorithms and heuristics

(mental shortcuts) that the clinician has developed and acquired over time. Decision

analysis, by requiring a specific model structure and assessment of the various

likelihoods and values of the outcomes, makes the decision process explicit and much

more amenable to examination, discussion, and intellectual challenge.

The range of clinical problems appropriate for decision analysis is vast. The two

major requirements for its use include:

The problem focuses upon a specific decision that must be made:

There is a trade-off involved in the decision

"Trade off" means that one of the choices considered should not be unambiguously

superior. As an example, a diagnostic test might carry some risk, but the trade-off is

more appropriate therapy when treatment is directed by the results of that test.

A decision tree is a kind of flowchart -- a graphical representation of the process for

making a decision or a series of decisions. Businesses use them to determine company

policy, sometimes simply for choosing what policy is, other times as a published tool

for their employees. Individuals can use decision trees to help them make difficult

decisions by reducing them to a series of simpler, or less emotionally laden, choices.

Page 6 of 22
Regardless of the context or type of decision, the structure of a decision tree remains

the same. Or you can say A decision tree is a decision support tool that uses a tree-like

graph or model of decisions and their possible consequences, including chance event

outcomes, resource costs, and utility. It is one way to display an algorithm.

1. Brainstorm each of the variables in the decision you want the decision tree to help

you make. Write them down on a sheet of paper, or in the margin of your main sheet.

If you were making a decision tree for buying a car, your variables might be

"price," "model," "fuel efficiency," "style" and "options."

2. Prioritize the variables you've listed and write them down in order. Depending on

the kind of decision you're making, you can prioritize the variables chronologically,

by order of importance, or both.

For a simple work vehicle, you might prioritize your car decision trees as

price, fuel efficiency, model, style and options. If you were buying the car as a

gift for your spouse, the priorities might go style, model, options, price, fuel

efficiency.

3. Draw a circle or box on 1 edge of your paper and label it to represent the most

important variable in your decision tree.

When buying a work vehicle, you might draw a circle on the left edge of your paper

and label it "price."

Page 7 of 22
4. Create at least 2, but preferably no more than 4, lines leading out from the first

variable. Label each line to represent an option or range of options derived from that

variable.

From your "price" circle, you could draw 3 arrows labeled "under $10,000,"

"$10,000 to $20,000" and "over $20,000."

5. Draw circles of boxes at the end of each line, representing the next priority on your

list of variables. Draw lines radiating from those circles representing the next set of

options. In many cases, the specific options will be different for each box, based on

the parameters chosen from your first decision.

In our example, each box would read "fuel efficiency." Because less expensive

cars often have lower gas mileage, your 2 to 4 choices from each fuel

efficiency circle would represent a different range.

6. Continue adding boxes and lines to your flowchart until you've reached the end of

your decision matrix.

It's common to come up with additional variables while you're creating your

decision tree. In some cases, these will apply to only 1 "branch" of your tree.

In others, it will apply to all branches.

Page 8 of 22
5.0 Construct a decision tree step-by-step

1. Grow the Decision tree

2. Assign the probabilities

Page 9 of 22
3. Assign the cash flows

4. Computer the expected values for each decision

Page 10 of 22
5. Summary

In conclusion, if not lease out to drill. The first probability is dry hole nothing inside

that. And will lose money $400,000. The second probability is natural gas, if sell the

natural gas not profit any money. The third probability is natural gas and some oil, if

Page 11 of 22
sell the natural gas and some oil can profit $400,000. The fourth probability is oil, if

sell the oil can profit $1,200,000.

Lastly, I will select lease out the land. This is because they can earn more money.

Compared to the other selection cannot 100% to profit the money. This is because the

probability is lower.

6.0 Benefits of using decision analysis

Decision analysis (DA) is the discipline comprising the philosophy, theory,

methodology, and professional practice necessary to address important decisions in a

formal manner. Decision analysis includes many procedures, methods, and tools for

identifying, clearly representing, and formally assessing important aspects of a

decision, for prescribing a recommended course of action by applying the maximum

expected utility action axiom to a well-formed representation of the decision, and for

translating the formal representation of a decision and its corresponding

recommendation into insight for the decision maker and other stakeholders.

The key advantage of the decision-analysis framework is its focus on quantifying

outcomes of interest to the decision maker, regardless of the availability of direct

evidence. For interventions that address paediatric populations, this advantage is

Page 12 of 22
particularly important because direct evidence is often unavailable. Evidence can be

limited because adverse outcomes are rare, because ethical concerns make studies

difficult to conduct, and because of other logistical complications pertaining to studies

of paediatric populations.

Advantage 1: Decision trees implicitly perform variable screening or feature selection

We described here why feature selection is important in analytics. We also introduced

a few common techniques for performing feature selection or variable screening.

When we fit a decision tree to a training dataset, the top few nodes on which the tree

is split are essentially the most important variables within the dataset and feature

selection is completed automatically!

Advantage 2: Decision trees require relatively little effort from users for data

preparation

Page 13 of 22
To overcome scale differences between parameters - for example if we have a dataset

which measures revenue in millions and loan age in years, say; this will require some

form of normalization or scaling before we can fit a regression model and interpret the

coefficients. Such variable transformations are not required with decision trees

because the tree structure will remain the same with or without the transformation.

Another feature which saves data prep time: missing values will not prevent splitting

the data for building trees. This article describes how decision trees are built.

Decision trees are also not sensitive to outliers since the splitting happens based on

proportion of samples within the split ranges and not on absolute values.

Advantage 3: Nonlinear relationships between parameters do not affect tree

performance

As we described here, highly nonlinear relationships between variables will result in

failing checks for simple regression models and thus make such models invalid.

However, decision trees do not require any assumptions of linearity in the data. Thus,

we can use them in scenarios where we know the parameters are nonlinearly related.

Advantage 4: The best feature of using trees for analytics - easy to interpret and

explain to executives!

Decision trees are very intuitive and easy to explain. Just build one and see for

yourself! interpreting a decision tree is very easy

Page 14 of 22
These advantages need to be tempered with one key disadvantage of decision trees:

without proper pruning or limiting tree growth, they tend to over fit the training data,

making them somewhat poor predictors.

5.0 Reference

1. http://books.google.com.my/

2. en.wikipedia.org

3. text book

4. http://www.clt.astate.edu/

5. http://www.wikihow.com/

Page 15 of 22
6.0 Coursework

1. Traditional Decision Support System in five way

The line between Decision Management Systems and Decision Support Systems (or

Executive Information Systems) can be blurry. This is especially true when

considering the kind of Decision Management System that handles tactical decisions,

Page 16 of 22
or where an operational decision is not completely automatedwhere the user is

presented with multiple valid options, such as possible offers to make.

Decision Management Systems are distinct, however, and they differ from traditional

Decision Support System in five ways:

1. Decision Support Systems provide information that describes the situation and

perhaps historical trends so that humans can decide what to do and which actions to

take. Decision Management Systems automate or recommend the actions that should

be taken based on the information that is available at the time the decision is being

made.

2. The policies, regulations, and best practices that determine the best action are

embedded, at least in part, in a Decision Management System where a Decision

Support System requires the user to remember them or look them up separately.

3. The information and insight presented in a Decision Support System is

typically backward looking, and Decision Support Systems are generally reactive

helping human decision-makers react to a new or changed situation by presenting

information that might help them make a decision. In contrast, Decision Management

Systems use information to make predictions and aim to be proactive.

4. Learning is something that happens outside a Decision Support System and

inside a Decision Management System. Users of Decision Support Systems are

expected to learn what works and what does not work and to apply what they learn to

future decisions. Decision Management Systems have experimentation or test-and-

learn infrastructure built in so that the system itself learns what works and what does

not.

Page 17 of 22
5. Decision Management Systems are integrated into an organization's runtime

environment. They make decisions for applications and services in the organization's

enterprise application architecture. In contrast, Decision Support Systems are often

desktop or interactive applications that execute outside the core application portfolio.

2. Build Rule Management Environment

By far the most common change that will be required as part of ongoing decision

analysis will be a change to executable business rules. Business rules will have to be

changed when regulations or policies change, as well as when the underlying data

Page 18 of 22
being used to make a decision changes. Any new decision-making approach for A/B

or champion- challenger testing will involve new or at least modified business rules.

Therefore, you should invest in creating a rule management environment designed for

business experts.

The use of a BRMS makes the logic of a Decision Service much more accessible for

non-technical business experts than traditional code-based approaches. The natural

language-like approach of a typical BRMS, combined with a suitable executable

object model and graphical business rules representations (such as decision trees and

decision tables), make it possible for IT and business experts to collaborate effectively

on the business rules. Whether the business experts code the rules themselves or rely

on business analysts or IT professionals is less important than this ability to

collaborate when defining the bulk of the business rules a Decision Service needs.

When a Decision Service has high volatility, however, and business rules changes

must be made regularly, the situation is different. When the need to make a rapid

business rules change is a common one, or when large numbers of business rules must

be changed periodically, the value of having the business experts make the change

themselves increases. The best way to support the decision analysis phase for these

kinds of decision services will be to create a business-centric rules management

environment.

A business-centric rules management environment has a number of characteristics:

Page 19 of 22
 Each business expert sees only the business rules for which he is responsible:

Multiple business experts might use the rule management environment, and they

should be able to read those rules they have read permissions for and change those

rules they have read/write permissions for. They should not have to navigate through a

lot of other rules or rule repository structures to find them.

These business rules are presented in context: Business users are making these

changes in a business contextfor instance, they are responding to new regulations or

trying to improve the performance of the decision service. This context should be

reflected in the rule management environment so that changing the rules feels like just

part of running the business.

The business rules editing environment allows only those changes that make

sense: Some rules can only be changed in certain ways because of the underlying data

only certain values can be set as a consequence of a rule, for instance. Conditions

and consequences that make no business or technical sense should not be allowed; if

the overall decision service constrains the specific rules in question to behave within a

range of allowed behavior, then this should also be enforced.

The business expert can rapidly see the impact of her proposed changes: The

rule management environment should be linked to the impact analysis tools and

techniques described later.

No unnecessary technical information is presented

With an environment like this, the business experts can take more direct control over

the business rules changes that are required. This will reduce the time to make the

Page 20 of 22
changes and improve their accuracy by eliminating the impedance of a business/IT

hand-off.

MANAGEMENT ENVIRONMENTS FOR THE REST OF THE SYSTEM

In theory, a similar argument could be made for building a business user- focused

environment that allows management of predictive analytic and optimization models.

In practice this has not yet become a mainstream proposition. Although both

predictive analytic and optimization vendors are making it easier for less technical

people to build models, the idea of a distinct management environment for ongoing

evolution and maintenance has not gained much traction.

Page 21 of 22