Lo601 – Decision-making under uncertainty

 

Stein W. Wallace

 

Lectures in room B136.

 

Exam on Saturday 28 May 2005. You may bring all printed and written material to the exam.

 

Literature: Stein W. Wallace: Decision-making under uncertainty: The art of modeling. Lecture notes from Molde University College. Handed out in class.

 

The course is an introduction in how different disciplines handle uncertainties in connection with planning. The goal is that students will be able to handle uncertainties in such as price, demand and travel times qualitatively, and to some degree, quantitatively.

The course will cover uncertainty in planning from mainly three different perspectives:
- Does the decision-makers understand uncertainty? What can we do to be correctly understood? These questions are dealt with in behavioral psychology.
- Which methods should be used to handle uncertainty correctly in planning models so that flexibility is maintained? This question is dealt with in operation analysis.
- Utility theories based on analyses of lotteries and basic options theory. These theories are dealt with in economics.

The technical difficulties in this course are relatively few. The challenge for all students is to understand what is going on, to grasp the qualitative aspects of the theories. It is easy to underestimate the difficulties involved in the theory and exercises. The best way to do homework and to work with the course is to discuss concepts and ideas with other students.

The major setup during the semester follows below. The first number on a line refers to the week number. Changes will occur as the semester proceeds.

Hand-ins are by 12 noon Friday in Weeks 6, 9, and 16.

 

  1. What is a model? (Chapter 1)  Home work:
    1. Take three models that you know from micro economics or logistics and characterize them according to normative/descriptive. Also, tell if they represent the economic man or the administrative man. For each model, what do you think is its weakest point (given its purpose)?
    2. Problem 3 from Chapter 2.
  2. What is uncertainty? (Section 2.1), stages, decision trees. (Sections 2.3 and 2.4 – not Example 19). Louveaux’ example used in class. Home work:
    1. Problems 1, 2 and 4 from Chapter 2.
    2. A simple decision-tree problem.
  3. How do we understand uncertainty? (Section 2.2). Home work: Preparation for Interviews
  4. Constraints, variables and the objective function.  (Sections 2.5 and 2.6). There will be a focus on Example 18, which starts in 2.4, and continues in 2.5 and 2.6. Home work to be handed in Friday in Week 6: Perform Interviews
  5. Week off to work with hand-in.
  6. Sensitivity and optimality (Chap 3). Home work: Problems 1 and 2 of Chapter 3, plus this decision problem. Slides used.
  7. Sensitivity and optimality (Chap 3). Hand-in for Friday in Week 9:
    1. Write a report to the board of the company based on “The Yellow Brick Road”. Emphasize the development of a model for the dispatcher so that he can send the trucks where they should go. He has a few problems. The major one is that there is a drift of trucks in one direction, as there is an unbalanced flow of goods. That is unavoidable, even with better planning at strategic level. There is also the problem that one dispatcher does not know what the other is doing. Finally, and this is where Lo601 comes in. When a truck becomes available, most likely, the load it is going to pick up next is not yet known. But it is almost certain that the load will not be where the truck is. Hence the truck needs to be moved, but where? If you wait until a load becomes available, you are lost, as you will be too far away from the load. So the question is, what kind of model does the dispatcher need? And, as you are writing a report to the board, what aspects of flexibility are involved? A board will never have a model developed if you do not tell them why.
  8. Week off to work with hand-in.
  9. Option theory (Chapter 4). The use of state prices is not part of the curriculum. For those cases where state prices are used we shall instead use the replication argument. Home Work: Exercises 1 2, and 5 of Chapter 4. Slides used in class.
  10. Option theory (Chapter 4). Home work: Exercises 7, 11 and 13
  11. Easter Week
  12. Option theory continued (Chapter 4) No specific exercises.
  13. Utility theory (Sections 5.1, 5.2.1 and 5.2.2). Home work: As part of the next hand-in, you need to relate to the following question: Should a company be risk neutral or risk averse? Use old courses or library resources to work on that subject.  Try to understand what the issues are.
  14. Arnt-Gunnar Lium will present a case of decision-making under uncertainty from less-than-truckload trucking. Major hand-in for Friday in Week 16.
  15. Week off to work with hand-in.
  16. Utility theory.
  17. Evaluation (Sections 7.1.1, 7.1.2 and 7.2). Exercises: Problem 2 in Chapter 7.
  18. Questions (so if you ask nothing, I say nothing)