Decision Science

Introduction to Decision Science

What is Decision Science
Decision science is a field that uses quantitative methods to help people make better
decisions. It draws on concepts from economics, statistics, mathematics, and
computer science to develop tools and techniques for understanding and evaluating
decision problems.

Decision science is used in a wide variety of fields, including business, healthcare,

government, and finance. Some of the common applications of decision science
include:

• Investment analysis: Decision scientists can help investors make better

investment decisions by analyzing the risks and rewards of different
investment options.
• Risk management: Decision scientists can help businesses and organizations
manage risk by identifying and assessing potential risks and developing
strategies to mitigate those risks.
• Pricing: Decision scientists can help businesses set prices that are both
profitable and competitive.
• Marketing: Decision scientists can help businesses develop marketing
campaigns that are more effective in reaching and converting their target
customers.
• Healthcare: Decision scientists can help healthcare providers make better
decisions about patient care, such as which treatments are most likely to be
effective and cost-efficient.

Important of decision science

The importance of decision science can be summarized in two main points:

1. It helps people make better decisions. Decision science provides a framework

for understanding and evaluating decision problems, and it offers a variety of
tools and techniques for making better decisions. This can be beneficial in
both personal and professional life.
2. It is a rapidly growing field. The demand for decision scientists is increasing
as businesses and organizations become more data-driven. This means that
there are good career opportunities for people who are interested in decision
science.
Some specific examples of the importance of decision science:

• In business, decision science can help companies make better investment

decisions, pricing decisions, and marketing decisions. This can lead to
increased profits and market share.
• In healthcare, decision science can help doctors make better treatment
decisions, and it can also help hospitals manage their resources more
effectively. This can lead to improved patient outcomes and lower costs.
• In government, decision science can help policymakers make better decisions
about resource allocation, public policy, and disaster preparedness. This can
lead to better outcomes for citizens.
• In the military, decision science can help commanders make better decisions
about troop deployment, weapons deployment, and risk assessment. This can
lead to increased mission success and reduced casualties.

some of the benefits of using decision science:

• Improved decision-making: Decision science can help people make better

decisions by providing them with a framework for understanding and
evaluating the problem, as well as a variety of tools and techniques for
making better decisions.
• Increased efficiency: Decision science can help businesses and organizations
become more efficient by helping them to make better decisions about how to
allocate their resources.
• Reduced risk: Decision science can help businesses and organizations
reduce their risk by helping them to identify and assess potential risks, and
then develop strategies to mitigate those risks.
• Improved communication: Decision science can help businesses and
organizations improve their communication by providing them with a common
language for discussing decision problems.
• Increased transparency: Decision science can help businesses and
organizations increase transparency by making their decision-making process
more open and accountable.

Role of quantitative techniques in decision science

Quantitative techniques are a set of tools and methods that use mathematical and
statistical analysis to solve decision problems. They are used in a wide variety of
fields, including business, healthcare, government, and finance.

In decision science, quantitative techniques are used to:

• Structure the decision problem: Quantitative techniques can be used to

identify the key decision variables, the possible outcomes, and the
 probabilities of those outcomes. This can help to clarify the decision problem
and make it easier to solve.
• Evaluate the alternatives: Quantitative techniques can be used to evaluate the
different alternatives available to the decision maker. This can be done by
calculating the expected value of each alternative, or by using other methods
such as decision trees or simulation modeling.
• Make the decision: Quantitative techniques can help the decision maker to
make a more informed decision by providing them with a better understanding
of the problem and the possible outcomes. However, they cannot make the
decision for the decision maker. Ultimately, the decision maker must use their
judgment and experience to make the final decision.

Some of the most common quantitative techniques used in decision science include:

• Linear programming: This is a technique for finding the best solution to a

problem that has a set of linear constraints. It is often used in business to
optimize production, distribution, and pricing decisions.
• Game theory: This is a technique for analyzing strategic interactions between
two or more players. It is often used in business to model competition
between firms or to design negotiation strategies.
• Decision trees: This is a graphical representation of a decision problem. It can
be used to calculate the expected value of each alternative and to identify the
best decision strategy.
• Simulation modelling: This is a technique for modelling and analysing complex
systems. It can be used to test different decision strategies and to evaluate
the impact of uncertainty.

Quantitative techniques are a powerful tool that can be used to improve decision-
making. However, they are not a substitute for judgment and experience. The
decision maker must always use their judgment to interpret the results of quantitative
analysis and to make the final decision.

Operations Research Models for business decision

making

Operations research (OR) is a field of applied mathematics, statistics, and computer

science that deals with the optimization of complex systems. OR models are used to
analyze and solve a wide variety of business problems, including:

• Production planning: OR models can be used to determine the optimal

production levels for a product, given the demand, costs, and resources.
• Inventory management: OR models can be used to determine the optimal
inventory levels for a product, given the demand, costs, and lead times.
 • Routing: OR models can be used to determine the optimal routes for vehicles,
given the distances, capacities, and time windows.
• Scheduling: OR models can be used to determine the optimal schedules for
tasks, given the resources, constraints, and priorities.
• Location: OR models can be used to determine the optimal locations for
facilities, given the demand, costs, and accessibility.
• Capacity planning: OR models can be used to determine the optimal capacity
levels for a facility, given the demand, costs, and constraints.
• Decision making under uncertainty: OR models can be used to make
decisions in situations where there is uncertainty about the future.

OR models can be used to improve decision-making in business by providing a more

objective and rational approach to problem solving. They can also help to identify
and quantify the risks associated with different decisions.

Here are some of the benefits of using OR models in business decision making:

• Improved decision-making: OR models can help decision-makers to make

better decisions by providing them with a more objective and rational
approach to problem solving.
• Reduced risk: OR models can help decision-makers to reduce risk by
identifying and quantifying the risks associated with different decisions.
• Increased efficiency: OR models can help businesses to become more
efficient by helping them to make better decisions about how to allocate their
resources.
• Improved communication: OR models can help businesses to improve their
communication by providing them with a common language for discussing
decision problems.
• Increased transparency: OR models can help businesses to increase
transparency by making their decision-making process more open and
accountable.

The methodology of operations research (OR) in decision science is a systematic

approach to solving decision problems. It involves the following steps:

1. Define the problem: The first step is to define the problem clearly and
concisely. This includes identifying the decision variables, the objective
function, and the constraints.
2. Develop a model: The next step is to develop a model of the problem. This
can be a mathematical model, a computer simulation, or a decision tree.
3. Solve the model: The third step is to solve the model. This can be done using
mathematical optimization techniques, simulation, or decision analysis.
 4. Analyse the results: The fourth step is to analyse the results of the model.
This includes interpreting the results and identifying the best course of action.
5. Implement the solution: The final step is to implement the solution. This
involves putting the decision into practice and monitoring the results.

Liner Programming
Linear programming (LP) is a method to achieve the best outcome (such as
maximum profit or lowest cost) in a mathematical model whose requirements are
represented by linear relationships. Linear programming is a special case of
mathematical programming.

More formally, linear programming is a technique for the optimization of a linear

objective function, subject to linear equality and linear inequality constraints. Its
feasible region is a convex polytope, which is a set defined as the intersection of
finitely many half spaces, each of which is defined by a linear inequality. Its objective
function is a real-valued affine (linear) function defined on this polyhedron. A linear
programming algorithm finds a point in the polytope where this function has the
smallest (or largest) value if such a point exists.

Here is a simple example of a linear programming problem:

A company produces two products, A and B. Each product requires the use of two
resources, labor and capital. The company has a limited amount of each resource
available. The company wants to maximize its profit, which is determined by the
price of each product and the amount of each product that is produced.

The problem can be formulated as a linear programming problem as follows:

Maximize: profit = 5A + 3B
Subject to:
labor <= 100
capital <= 60
A + 2B <= 120

The first equation is the objective function, which is to maximize the profit. The
second equation is a constraint on the amount of labor available. The third equation
is a constraint on the amount of capital available. The fourth equation is a constraint
on the production of product A.

This problem can be solved using a linear programming algorithm. The algorithm will
find the values of A and B that maximize the profit, subject to the constraints.

Linear programming is a powerful tool that can be used to solve a wide variety of
problems, including:

• Production planning
 • Inventory management
• Transportation planning
• Financial planning
• Portfolio optimization
• Resource allocation
• Facility location
• Blending problems
• Cutting stock problems

Assumption
Certainty-In LP models, it is assumed that all its parameters such as: availability of
resources, profit (or cost) contribution per unit of decision variable and consumption
of resources per unit of decision variable must be known and constant.
Additivity-The value of the objective function and the total amount of each resource
used (or supplied), must be equal to the sum of the respective individual contribution
(profit or cost) of the decision variables.
For example, the total profit earned from the sale of two products A and B must be
equal to the sum of the profits earned separately from A and B. Similarly, the amount
of a resource consumed for producing A and B must be equal to the total sum of
resources used for A and B individually
Divisibility (or continuity)-The solution values of decision variables are allowed to
assume continuous values. For instance, it is possible to collect 6.254 thousand
litres of milk by a milk dairy and such variables are divisible.
Linearity (or proportionality-The amount of each resource used (or supplied) and
its contribution to the profit (or cost) in objective function must be proportional to the
value of each decision variable. ► For example, if production of one unit of a product
uses 5 hours of a particular resource, then making 3 units of that product uses 3x5 =
15 hours of that resource

Decision Theory
Decision theory is a branch of applied mathematics, statistics, and philosophy
concerned with the theory of making decisions based on assigning probabilities to
various factors and assigning numerical consequences to the outcome.

In decision science, decision theory is used to:

• Structure the decision problem: Decision theory can be used to identify the
key decision variables, the possible outcomes, and the probabilities of those
outcomes. This can help to clarify the decision problem and make it easier to
solve.
 • Evaluate the alternatives: Decision theory can be used to evaluate the
different alternatives available to the decision maker. This can be done by
calculating the expected value of each alternative, or by using other methods
such as decision trees or simulation modelling.
• Make the decision: Decision theory can help the decision maker to make a
more informed decision by providing them with a better understanding of the
problem and the possible outcomes. However, they cannot make the decision
for the decision maker. Ultimately, the decision maker must use their
judgment and experience to make the final decision.

Here are some examples of how decision theory is used in decision science:

• Investment analysis: Decision theory can be used to help investors make

better investment decisions by analysing the risks and rewards of different
investment options.
• Risk management: Decision theory can be used to help businesses and
organizations manage risk by identifying and assessing potential risks, and
then developing strategies to mitigate those risks.
• Pricing: Decision theory can be used to help businesses set prices that are
both profitable and competitive.
• Marketing: Decision theory can be used to help businesses develop marketing
campaigns that are more effective in reaching and converting their target
customers.
• Healthcare: Decision theory can be used to help doctors make better
treatment decisions, and it can also be used to help hospitals manage their
resources more effectively.

Decision theory is a valuable tool that can be used to improve decision-making in a

wide variety of settings. It is a rapidly growing field with good career opportunities,
and it is a field that is sure to become even more important in the future.

Decision Under certainty

Decision making under certainty is a situation where the decision maker knows with
certainty all the possible outcomes of each decision alternative and the probability of
each outcome. In this situation, the best decision is the one that has the highest
expected value, which is the average of the values of each outcome, weighted by its
probability.

For example, let's say you are deciding whether to invest in a particular stock. You
know that the stock can either go up or down in value, and you know the probability
of each outcome. If the stock goes up, you will make a profit of $100; if the stock
goes down, you will lose $50. The expected value of the investment is therefore
($100)(0.5) + (-$50)(0.5) = $25. This means that, on average, you expect to make a
profit of $25 if you invest in the stock.
Decision making under certainty is a relatively simple situation, but it is still important
to understand the concept. In many situations, the decision maker will not have
perfect information about the possible outcomes or their probabilities. In these cases,
the decision maker will need to use decision making under uncertainty or risk.

Here are some of the advantages of decision making under certainty:

• It is a simple and straightforward approach to decision making.

• It is easy to calculate the expected value of each alternative.
• It is a good approach to use when the decision maker has perfect information
about the possible outcomes and their probabilities.

Here are some of the disadvantages of decision making under certainty:

• It is not always realistic to assume that the decision maker has perfect
information.
• It does not take into account the decision maker's risk preferences.
• It can lead to suboptimal decisions in situations where the decision maker is
risk-averse.

Decision under uncertainty

Decision making under uncertainty is a type of decision making where the decision
maker does not have complete or perfect information about the possible outcomes of
their decision. This can be due to a variety of factors, such as the lack of data, the
complexity of the problem, or the inherent randomness of the environment.

There are a number of different approaches to decision making under uncertainty.

Some of the most common approaches include:

• Decision trees: Decision trees are a graphical representation of a decision

problem. They show the possible outcomes of each decision, as well as the
probabilities of those outcomes. Decision trees can be used to calculate the
expected value of each decision alternative.
• Expected utility theory: Expected utility theory is a mathematical framework for
making decisions under uncertainty. It assumes that decision makers have
preferences over outcomes, and that they can quantify those preferences
using a utility function. Expected utility theory can be used to calculate the
expected utility of each decision alternative.
• Bayesian decision theory: Bayesian decision theory is a decision-making
framework that uses Bayes' theorem to update the decision maker's beliefs
about the probabilities of the outcomes as new information becomes
available. Bayesian decision theory can be used to make decisions under
 uncertainty when the decision maker has some prior information about the
probabilities of the outcomes.

Here are some tips for making decisions under uncertainty:

• Gather as much information as possible. The more information you have, the
better equipped you will be to make a good decision.
• Identify the possible outcomes of your decision. Not all outcomes are equally
likely, so it is important to consider all of the possibilities.
• Estimate the probabilities of the possible outcomes. The probabilities of the
outcomes will affect the value of each decision alternative.
• Use a decision-making framework to help you choose the best decision.
There are a number of different decision-making frameworks available, so
choose one that is appropriate for the problem you are facing.
• Be prepared to adapt your decision if new information becomes available. The
world is constantly changing, so it is important to be flexible and willing to
change your mind if necessary.

Decision Under Risk

Decision-making under risk is a type of decision-making where the decision maker
knows the possible outcomes of their decision, but they do not know the probabilities
of those outcomes. This is in contrast to decision-making under uncertainty, where
the decision maker does not know the possible outcomes of their decision.

There are a number of different approaches to decision making under risk. Some of
the most common approaches include:

• Expected value: The expected value of a decision is the average of the

possible values of the outcome. It is calculated by multiplying the value of
each outcome by its probability and then adding the products together.
• Utility theory: Utility theory is a mathematical framework for making decisions
under risk. It assumes that decision makers have preferences over outcomes,
and that they can quantify those preferences using a utility function. The utility
function is a mathematical representation of the decision maker's preferences.
• Decision trees: Decision trees are a graphical representation of a decision
problem. They show the possible outcomes of each decision, as well as the
probabilities of those outcomes. Decision trees can be used to calculate the
expected value of each decision alternative.
• Simulation modelling: Simulation modelling is a technique for modelling and
analysing complex systems. It can be used to test different decision strategies
and to evaluate the impact of risk.

.
Here are some tips for making decisions under risk:

• Identify the possible outcomes of your decision.

• Estimate the probabilities of the possible outcomes.
• Calculate the expected value of each decision alternative.
• Choose the decision alternative with the highest expected value.
• Be prepared to adapt your decision if new information becomes available.