Decision Theory Flashcards
deals with methods in determining the optimal course of action when several alternatives are available, and their consequences cannot be forecast with certainty.
decision theory
The elements of a typical business problem
includes the following:
- possible alternatives in the form of actions or acts
- states of nature or possible events
- outcome of a random process.
- Probabilities of such events
- Payoff
consequences because of each possible alternative-event combination.
Payoff
is the cognitive process of selecting a course of action out of a set of available alternatives, to achieve the goals of the organization.
Decision making
The Elements of Decision Making
variables are designated as a1 a2 a3 The given “lockdown operations” problem presents 3 alternatives which are listed on the left-hand side of the decision table.
**Alternative courses of action **or **decision variables **
The Elements of Decision Making
presented at the top of thee table are the possible “——” or called events.
States of nature
The Elements of Decision Making
These are labeled in the problem as
s1 s2 s3. the states of nature can also be presented as rows
States of nature
The Elements of Decision Making
the probabilities are given in percentage and are usually placed at the top of the table.
Probabilities of Occurrence of the States of Nature
The Elements of Decision Making
The assumption is that only one of the given states of nature will happen n the future.
Probabilities of Occurrence of the States of Nature
The Elements of Decision Making
each alternative course of action can be found at the intersection of a given alternative and the corresponding state of nature.
Payoffs
A discipline addressing important practices to assess a recommended course of action for the decision-maker
Decision Analysis
The Elements of Decision-making:
- Alternative Courses of Action (choices)
- State of Nature (factors)
- Payoff (consequences)
The decision maker —— situation, also called “deterministic” situation
Under Certainty
It is a perfect predictor of the future because of the availability of complete information, naturally they will choose the alternative that has the best result.
Under Certainty
The decision-maker know with certainty the consequence of every alternative or decision choice.
Under Certainty
The most common approach to solve decision-making ——– is the expected payoff criterion.
under Risk
The decision-maker must select the alternative with the highest expected payoff.
Decision under Risk
The expected payoff of an alternative is defined as the sum of all possible payoffs of that alternative, weighted by probabilities of occurrence of those payoffs
Decision Under risk
the decision-maker in this situation can not estimate or does not have knowledge of the probability of occurrence of possible states of nature.
Under Uncertainty
However, the situation should not be considered “total ignorance” since the states of nature are known.
Under Uncertainty
This situation typically arises whenever there is a new phenomenon, development of an innovative product, or new processes.
Under Uncertainty
This criterion is appropriate for Pessimist persons. The decision-maker looks at the worst that can happen under each action and then choose the action that has the largest payoff for the worst-case scenario.
Pessimistic Approach or (MAXIMIN)
“Maximin” means
“Maximize the Minimum Payoff”
In this criterion, the user always assumes that the most favorable outcome will occur.
Optimistic Approach or (MAXIMAX)
“Maximax” means
“Maximize the Maximum Payoff”
Criterion is most suitable for decision-makers who are neither completely pessimistic nor optimistic.
The Criterion of Realism or (HURWICZ)
The best alternative is the one with the highest weighted value (WV) for maximization problems.
The Criterion of Realism or (HURWICZ)
In this criterion, the decision-maker assumes that all states of nature have equal probabilities to occur and Then the highest expected payoff is selected.
Equal Likelihood or (LAPLACE)
is based on the concept of Opportunity Lost, which means an opportunity loss is incurred whenever the decision overlooks the best alternative.
Savage Regret or (MINIMAX)
