Quantitative Techniques for Decision Making

• Decision Making is a process of consciously choosing an alternative among several available (examples).

• Decision making can be with complete certainty, risk & uncertainty and complete uncertainty.

• QTs assist in decision making in the above situations.

Quantitative Techniques for Decision Making

• Quantitative analysis in decision making involves the use of scientific approach (No whim, emotions or guesswork).

• Raw data is processed into a meaningful information to arrive at a decision (examples).

• Both QTs are used for decision making.

Statistics and its role

1. Introduce the field of statistics

2. Demonstrate how statistics applies to business

3. Establish the link between statistics and data

4. Identify the different types of data and data-collection methods

5. Differentiate between population and sample data

6. Differentiate between descriptive and inferential statistics

What Is Statistics?

Why?1. Collecting Data e.g., Survey

2. Presenting Data e.g., Charts & Tables

3. Characterizing Data e.g., Average

Data Analysis

Decision-Making

© 1984-1994 T/Maker Co.

© 1984-1994 T/Maker Co.

What Is Statistics?

Statistics is the science of data. It involves collecting, classifying, summarizing, organizing, analyzing, and interpreting numerical information.

Statistics: Two Processes

Describing sets of data

and

Drawing conclusions (making estimates, decisions, predictions, etc. about sets of data based on sampling)

© 2011 Pearson Education, Inc

Statistical Methods

Statistical

Methods

Descriptive

Statistics

Inferential

Statistics

Statistical methods

• In using statistical methods, a manager may face one or all of the following situations:– when data need to be presented in a form which

helps in easy grasping (e.g., presentation of performance data in graphs, charts, and tables, in the annual report of a company).

– where no specific action is contemplated but it is intended to test some hypotheses and draw inferences.

Statistical methods– when some unknown quantities have to be

estimated or relationships established through observed data.

– when a decision has to be made under uncertainty regarding a course of action to be followed.

• Situation (i) falls into descriptive statistics; • Situations (ii) and (iii) fall into inductive or

inferential statistics; • Situation (iv) falls into statistical decision

theory.

Descriptive Statistics

1. Involves• Collecting Data• Presenting Data• Characterizing Data

2. Purpose• Describe Data

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© 2011 Pearson Education, Inc

1. Involves• Estimation (No. of

students opting engineering seats)

• Hypothesis Testing (soft branches by)

2. Purpose• Make decisions about

population characteristics

Inferential Statistics

Population?

Fundamental Elements1. Experimental unit

• Object upon which we collect data

2. Population• All items of interest

3. Variable• Characteristic of an individual

experimental unit

4. Sample• Subset of the units of a population

Fundamental Elements

1. Statistical Inference• Estimate or prediction or generalization about a

population based on information contained in a sample

2. Measure of Reliability• Statement (usually qualified) about the degree

of uncertainty associated with a statistical inference

Four Elements of Descriptive Statistical Problems

1. The population or sample of interest2. One or more variables (characteristics of the

population or sample units) that are to be investigated

3. Tables, graphs, or numerical summary tools4. Identification of patterns in the data

Five Elements of Inferential Statistical Problems

1. The population of interest2. One or more variables (characteristics of the

population units) that are to be investigated3. The sample of population units4. The inference about the population based on

information contained in the sample5. A measure of reliability for the inference

Types of Data

Types of

Data

QuantitativeData

QualitativeData

Types of Data

Quantitative data are measurements that are recorded on a naturally occurring numerical scale.

Qualitative data are measurements that cannot be measured on a natural numerical scale; they can only be classified into one of a group of categories.

Quantitative Data

Measured on a numeric scale.

• Number of defective items in a lot.

• Salaries of CEOs of oil companies.

• Ages of employees at a company.

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Qualitative Data

Classified into categories.• College major of each student in a class.• Gender of each employee at a company.• Method of payment (cash, check, credit card).

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Types of Data

1. Data from a published source2. Data from a designed experiment3. Data from a survey4. Data collected observationally

Category 1 is a secondary source; 2,3, and 4 fall into Primary source of data

Obtaining DataPublished source:

book, journal, newspaper, Web siteDesigned experiment:

researcher exerts strict control over unitsSurvey:

a group of people are surveyed and their responses are recorded

Observation study:units are observed in natural setting and variables of interest are recorded

• Economics– Forecasting

– Demographics

• Sports– Individual & Team

Performance

• Engineering– Construction

– Materials

• Business– Consumer Preferences

– Financial Trends

Some Statistical Applications Areas

Some Statistical Applications Areas

• Accountants make decisions based on the information relating to the financial state of organization.

• Marketing staff make decisions based on customer response to product and design.

• Personnel managers make decisions based on the information relating to the levels of employment in the organization.

Some Statistical Applications Areas

• Production executives use statistical methods for R & D programmes to improve the quality of the processes and products (SQC).

• Probable dividends for future years can be decided based on a correlation study of profits and dividends in the present and previous years (-- Finance department).

• Physical sciences such as astronomy, geology, meteorology, etc. use statistical methods such as sampling, estimation, DoE, etc.

• Medical science also use statistics.• Government agencies – state or central - do use statistics;

census, identification of the target beneficiaries for various schemes and many more.

Some limitations

• Statistics does not study qualitative phenomena.• Statistics does not study individuals • Statistics can be misused (skill & experience are

needed to draw useful inferences – god or devil)

Operations Research Techniques

• A technique that provides a quantitative basis for the executives for decision making.

• Nature of OR models