decision making under uncertaionity

Statistical

By;Suresh T S

I PG M.Com , 314

DecisionTheory

Monday, April 17, 2023 Operations Research 2

The Decision-Making Process

Problem Decision

Quantitative Analysis

LogicHistorical DataMarketing ResearchScientific AnalysisModeling

Qualitative Analysis

EmotionsIntuitionPersonal Experience and MotivationRumors


Steps to Good Decision Making

1. Define problem and influencing factors.

2. Establish decision criteria.

3. Select decision-making tool (model).

4. Identify and evaluate alternatives using decision-making tool (model).

5. Select best alternative.

6. Implement decision.

7. Evaluate the outcome.


Decision Theory

Associated Terms:

Alternative (Acts)Course of action or choice. Decision-maker chooses among alternatives.

State of nature (Events) An occurrence over which

the decision maker has no control.


1) Decision making under certaintyThe outcome of a decision alternative is known (i.e., there is only one state of nature.)

2) Decision making under riskThe outcome of a decision alternative is not known, but its probability is known.

3) Decision making under uncertaintyThe outcome of a decision alternative is not known, and even its probability is not known.

Types of Decision Making


Decision Making under Uncertainty

The outcome of a decision alternative is not known, and even its probability is not known.

A few criteria (approaches) are available for the decision makers to select according to their preferences and personalities


Decision Making Under Uncertainty

1. Maximax Criterion

2. Maximin Criterion

3. Minimax Criterion

4. Laplace Criterion (Equally likelihood)

5. Hurwiczalpha Criterion ( Rationality or Realism)


Criterion 1: Maximax (Optimistic)

An adventurous and aggressive decision maker may choose the act that would result in the maximum payoff possible

Step 1 - Pick maximum payoff of each alternative. Step 2 - Pick maximum of those maximums in Step 1;

its corresponding alternative is the decision. This is viewed as an optimistic approach, “Best of

bests”.


Criterion 2: Maximin (Pessimistic)

This is also called Waldian criterion. This criterion of decision making stands for choice between alternative courses of action assuming pessimistic view of nature

• Step 1 - Pick minimum payoff of each alternative• Step 2 - Pick the maximum of those minimums in Step 1,

its corresponding alternative is the decision

This is viewed as a pessimistic approach, “Best of worsts”


Criterion 3: Hurwicz (Realism)

This method is a combination of Maximin and Maximax criterion. Also known as criterion of rationality.

neither too optimistic nor too pessimistic

• Step 1 - Calculate Hurwicz value for each alternative• Step 2 - Pick the alternative of largest Hurwicz value as the

decision.

Hurwicz value of an alternative

= (row max)() + (row min)(1-)where (01) is called coefficient of realism.


Criterion 4: Equally Likely

The decision maker makes a simple assumption that each state of nature is equally likely to occur & compute average payoff for each. Choose decision with highest average payoff.

Also known as Laplace criterion

• Step 1 - Calculate the average payoff for each alternative.• Step 2 - The alternative with highest average if the decision.


Criterion 5: Minimax Regret

Application of the minimax criterion requires a table of losses or table of regret instead of gains.

Regret is amount you give up due to not picking the best alternative in a given state of nature.

Regret = Opportunity cost = Opportunity loss

• Step 1 - Construct a ‘regret table’,• Step 2 - Pick maximum regret of each row in regret table,• Step 3 - Pick minimum of those maximums in Step 2, its

corresponding alternative is the decision.

decision making under uncertaionity

Business

decision alternative

criterion of decision

decision making

decision theory

decision criteria

decision makers

types of decision

good decision