Decision Theory Flashcards
Are the two classifications of decisions according to the degree of certainty.
Deterministic Model and Probabilistic Model
The manager assumes complete certainty and each strategy results in a unique payoff.
Deterministic Model
Each strategy results in more than one payoff and tye manager attaches a probability measures to these payoffs.
Probabilistic Model
Can be viewed as occurring on the two extremes of scale, which represents the range of assumed certainty.
Decision-making under certainty (DMUC) and Decicion-making under uncertainty (DMUU)
The area between the two extremes of scale and aligns with the idea of probabilistic model is called as
Decision-making under risk (DMUR)
These are the other classification of decisions that must be taken into consideration before creating a model.
Linear or non-linear behavior, static or dynamic conditions, single or multiple objectives
Is a study that emphasizes technique for choosing tye best course of action when there are several options and it is impossible to foresee how they will work out. Its primary goal us to make a decision under risk and uncertainty.
Decision theory
Conclusion of a process designed to weigh the relative
utilities or merits of a set of available alternatives so that the most preferred course
of action can be selected for implementation.
Decision
Resolution made after thoughtful consideration.
Decision
Entails doing all
required to determine which option is most suited to achieving the desired goal or
objective.
Decision-making
Needs to include a set of
priorities, a system of goals or objectives, techniques for listing all possible and viable route options, and a way for determining which option is most beneficial.
Decision-making
According to management theory, the fundamental role of management is to
Allocate resources to achieve organizational goals
Why must a decision be made?
Resources are limited, human
desires and needs are diverse and limitless, and everyone seeks to meet their
requirements in a setting with finite resources.
Are taken to achieve
these goals and objectives.
Decisions
Helps in making a choice that will best meet their needs.
Decision Theory
There is friction between two persons while they are working in an organization because of their different
Behavior, attitude, mindsets
Each department in an organization has a goal of its own, but they are
dependent on the general objective of the organization.
Decision and Conflict
Decision-makers must take into account all these elements of decision-making to minimize the impact of conflicts across departments or between subordinate goals to achieve the overall objective of the organization.
Through the fire
It is crucial and requires the application of multiple
considerations such as psychological, philosophical, economic, sociological,
statistics, and even political science and operations research.
Decision Theory
What are the two phases of decision making?
- Decision-maker sets up a structure of details to come up with the decisions.
- Decision-maker is now in the process of analyzing all the
considerations and the process of selecting the optimal strategy.
Decisions can be categorized generally as
Strategic and Administrative Decisions
Involves the external environment of the organization
Strategic Decisions
Are made for daily operations.
Administrative Decisions
Other classifications relating to the nature of problem are
Programmed and Non-Programmed Decisions
Which provide solutions for clearly structured
and repetitive problems.
Programmed Decisions
Which answer unusual or
non-routine problems.
Non-Programmed Decisions
Some types of decisions rely on their scope, complexity, and the
measurement of involved people in the decision which are called
Individual and Managerial Decisions
May include solutions to ethical dilemmas for instance.
Individual Decisions
Are larger in scope and more
complex.
Managerial Decisions
In the aspect of the sphere of interest, whether it is political, economic, or scientific, etc., decisions can be classified as
Static or Dynamic Decisions
Need only one
decision
Static
A series of decisions
Dynamic
Steps in Decision Theory Approach
- Decision-maker must list all the possible strategies that are feasible and need to be considered in the decision.
- After the alternatives are listed, the latter projects and enumerates the states
of nature known as future events. - Continuing the process, payoff tables will then be constructed. In this step, each payoff table created contains one viable alternative paired with a state of
nature.
When decisions made by the managers reach complete certainty on the scale
of assumed certainty.
Decision-making under certainty (DMUC)
This model provides an overview in which there is more than one outcome, and managers know the probability measure of each outcome.
Decision-making under risk (DMUR)
This scenario of decision-making can be described as measurable wherein managers
know the basis for deciding. Moreover, It implies that the state of nature is clear and
highly probable which follows the approach of a deterministic model.
DMUC
The optimal strategy in decision-making under risk is identified by the strategy with the
Highest expected utility (or highest expected value)
Is the most popular
and widely used method in decision-making under risk. It is defined as the product of payoffs of each state of nature and probabilities of the respective states of nature
Expected Monetary Value (EMV)
Is equal to the maximum of the EMVs of all decision alternatives.
Optimal Expected Monetary Value (OEMV)
Is formulated exactly in the same way as decision-making under risk, the only difference is that no probability to each strategy is attached.
Decision-making under uncertainty (DMUU)
Two approaches to solving the problem of decision-making under uncertainty:
Pessimistic and Optimistic Approach
Determines the best possible outcome in each strategy.
Criterion of Optimism
Determines the worst possible outcome in each strategy.
Criterion of Pessimistic
The criteria that minimize the
maximum regret.
Criterion of Regret/Opportunity Loss Matrix
Assumes that all probability of occurrence for the state of nature are equal, and thus each state of nature is equally likely.
Equal Probability Criterion
In criterion of _____, the idea is to choose the maximum of the maximum values or Maximax
Optimism
Under this criterion, first, determine the worst possible outcome in each strategy (row minimums), and select the best of the worst outcome. This
process is also known as Maximin.
Pessimism
In each column, identify the highest element and then subtract all the individual elements of that column, cell by cell, from the highest
element to obtain the corresponding column of the regret matrix.
Criterion of Regret/Opportunity Loss Matrix Applied
Is applied when no objective evidence is present. As
these objectives are not evidence in the problem, equal probabilities can be applied
to each state of nature.
Equal Probability Criterion or Laplace Criterion/Criterion of
Insufficient Reason.
This model provides an overview of the competitive situations in which competitors or opponents apply logical processes and techniques to choose a strategy that best suits their situation.
Decision-Making Under Conflict and Competition
Which means that whatever one gains, one will lose the
same.
2 Person Zero Sum Game
If a single strategy is chosen by the player.
Pure Strategy Game
It falls under making decisions under uncertainty. It is also known as the weighted average criterion, which is a compromise between the
optimistic (maximax) and pessimistic (maximin) decision criteria.
Hurwicz Criterion (Criterion of Realism)
Only one decision is made at a single stage, and the available data are not subject to revision. However, there are situations where it is necessary to make
several decisions simultaneously. Due to the impact of one decision on subsequent decisions, these problems have become a multistage problem.
Decision Trees
In cases where the business requires a sequence of decisions, it can utilize a functional device known
as a __________. It is a schematic representation of a decision
problem.
Decision Tree
Decision tree consists of
nodes, branches, probability estimates, and payoffs
There are two (2) types of nodes:
Decision node and Chance node
It is represented by a square, which requires a conscious decision to be made, to choose one of the branches that emanate from the node.
Decision node
There are also two (2) types of
branches:
Decision branch and Chance branch
It is denoted by parallel lines that represent a strategy or a course of action.
Decision branch
It is represented by a single line that represents a chance-determined event.
Chance branch
When a branch marks the end of a decision tree, it is not followed by a decision, or the
chance node will be called a
Terminal branch
______ can either be positive or
negative. They can also be associated with a decision or chance branch. These can be placed alongside the appropriated branch, except that these are associated with the terminal branches of the decision tree will be shown at the end of these branches.
Payoff
There are no chance nodes,
and only one decision is involved in a
Single-stage deterministic decision tree
It contains at least one chance node and involves the making of only one decision.
Single-stage stochastic decision tree
It contains at least one chance node and involves the making
of a sequence of decisions.
Multistage stochastic decision tree
