Quantitative Business Analysis
(QBA)
I. Lindner and J.R. van den Brink
Q tit ti Business
Quantitative
B i
Analysis
A l i
Dates lectures:
October 31, November 7, 14, 21, 28,
December 5
Time: 11:00-12:45,
Ti
11 00 12 45
Location: WN-KC 137
Quantitative Methods (QBA)
2
Q tit ti Business
Quantitative
B i
Analysis
A l i
• T
Tutorials:
torials: Tuesdays
T esda s and Wednesdays
Wednesda s
• Prepare exercises beforehand!
• Program for the first two weeks:
Exercises from chapter “Topic E1 –
Exercises Decision Analysis”:
week 1:
1.1, 1.2, 1.3, 1.5, 1.8
week 2:
1.4, 1.6, 1.7, 1.9
Quantitative Methods (QBA)
3
Quantitative Business Analysis
Contents of the Course
Week 1-2 (Ines Lindner)
1 Decision Analysis using Decision Trees
1.
Weekk 3-6
W
3 6 (René
(R é van den
d Brink)
B i k)
2. Strategic Thinking - Noncooperative Games
Quantitative Methods (QBA)
4
Quantitative Business Analysis
• Book “Quantitative Business Analyses”
by C. van Montfort and J.R. van den Brink:
chapter T1,
T1 T2,
T2 E1 and E2;
• Book is available at Aureus
• Sheets of lectures (on Blackboard)
• Relevant sections for decision theory:
8.1-8.3,, 8.5 (except
(
p “Usingg Excel...”),
), 8.6,, 8.88.10
• We don’t discuss software applications in this
course!
Quantitative Methods (QBA)
5
Quantitative Business Analysis
Two efficient strategies to pass
the exam!
Quantitative Methods (QBA)
6
Quantitative Business Analysis
Facts:
• You have to read the text material in
order to pass the exam.
• Rule of thumb: A lecture is only fun if
you already know 50 percent.
Conclusion: Read text material before
lecture and take lecture as revision.
revision
Quantitative Methods (QBA)
7
Quantitative Business Analysis
Facts:
• It is very tempting to just sit passively in
th tutorials
the
t t i l andd watch
t h discussion
di
i off
exercises.
• Problem: Passive understanding is not
enough for exam.
Conclusion: Try to do the exercises yourself
and take tutorial as a feedback on your
performance.
8
Quantitative Business Analysis
→ Answers to exercises decision theory will
be available at the end of week 2.
2
9
Decision Theory
Central question: What is the best decision to take?
Assumptions:
• We have some information.
• We are able to compute with perfect accuracy.
• We are fully rational.
Quantitative Methods (QBA)
10
What kinds of decisions need a
theory?
Optimization – examples
• How can we pproduce at lowest costs?
• What is the best product mix?
p
wayy to spend
p
myy moneyy
• What is an optimal
(intertemporal choice)?
Quantitative Methods (QBA)
11
What kinds of decisions need a
theory?
Choice under risk – examples
y
• Should I pplayy the lottery?
• What kind of insurrence should I buy?
y
• How should I invest myy money?
Quantitative Methods (QBA)
12
What kinds of decisions need a
theory?
Interacting decision makers (game theory) –
examples
• The telephone conversation broke down – shall I
wait or call back myself (depends on what other
person does)?
d )
• As a firm, shall we enter a new market (depends
on competing
ti firms)?
fi
)?
• What is the best strategy to get promoted
(d
(depends
d on your bboss)?
)?
Quantitative Methods (QBA)
13
What kinds of decisions need a
theory?
Game theory:
y
• Additional difficulty: the need to take into
account how other people in the situation will act.
• Presence of several “players” (strategically acting
agents).
• Requires strategic analysis (week 3-6).
Quantitative Methods (QBA)
14
Decision Theory
Central question: What is the best decision to take?
• Absence of strategic considerations.
• Can be seen as a one-player game.
Quantitative Methods (QBA)
15
Decision Analysis
using Decision Trees
Dilemma: organize party indoors or in
ggarden? What if it rains?
Events and Results
Choices
Rain
Sunshine
In Garden
Disaster
Real comfort
Indoors
Mild discomfort Regrets
but content
Quantitative Methods (QBA)
16
Decision Analysis
using Decision Trees
Dilemma: organize party indoors or in
ggarden? What if it rains?
Events and Results
Choices
Rain
Sunshine
In Garden
Disaster
Real comfort
Indoors
Mild discomfort Regrets
but content
Quantitative Methods (QBA)
17
Decision Analysis
using Decision Trees
Dilemma: organize party indoors or in
ggarden? What if it rains?
Events and Results
Choices
Rain
Sunshine
In Garden
Disaster
Real comfort
Indoors
Mild discomfort Regrets
but content
Quantitative Methods (QBA)
18
Decision Tree Components
Decision 1
Decision node
or Decision fork
f k
Decision 2
Event 1
Event node or
Uncertainty fork
Event 2
Quantitative Methods (QBA)
19
Decision Tree
Rain
Ruined refreshments
Damp Guests
Unhappines
Party Outdoors
No Rain
Very pleasant party
Distinct comfort
Decision
1
Rain
Crowded but dry
Happy
Proper feeling of
g sensible
being
Party Indoors
No Rain
Crowded, hot
Regrets about what
might have been
Quantitative Methods (QBA)
20
Decision Tree
Rain
Ruined refreshments
Damp Guests
Unhappines
Party Outdoors
No Rain
Very pleasant party
Distinct comfort
Decision
1
P ff ?
Payoffs
Rain
Crowded but dry
Happy
Proper feeling of
g sensible
being
Party Indoors
No Rain
Crowded, hot
Regrets about what
might have been
Quantitative Methods (QBA)
21
Decision Tree
Rain
Ruined refreshments
Damp Guests
Unhappines
Party Outdoors
No Rain
Very pleasant party
Distinct comfort
Decision
1
Rain
Crowded but dry
Happy
Proper feeling of
g sensible
being
Party Indoors
Highest
Hi
h
payoff
No Rain
Crowded, hot
Regrets about what
might have been
Quantitative Methods (QBA)
22
Decision Tree
Rain
Ruined refreshments
Damp Guests
Unhappines
Party Outdoors
No Rain
Very pleasant party
Distinct comfort
Decision
1
Rain
Crowded but dry
Happy
Proper feeling of
g sensible
being
Party Indoors
Lowest
L
payoff
No Rain
Crowded, hot
Regrets about what
might have been
Quantitative Methods (QBA)
23
Decision Tree
Rain
Ruined refreshments
Damp Guests
Unhappines
Party Outdoors
-100
No Rain
Very pleasant party
Distinct comfort
Decision
100
1
Rain
Crowded but dry
Happy
Proper feeling of
g sensible
being
Party Indoors
50
No Rain
Crowded, hot
Regrets about what
might have been
Quantitative Methods (QBA)
-50
24
Possible Interpretation
p
of Payoffs:
y
How much is this outcome worth to me?
Rain
Ruined refreshments
Damp Guests
Unhappines
Party Outdoors
-100
No Rain
Very pleasant party
Distinct comfort
Decision
100
1
Rain
Crowded but dry
Happy
Proper feeling of
g sensible
being
Party Indoors
50
No Rain
Crowded, hot
Regrets about what
might have been
Quantitative Methods (QBA)
-50
25