Inroduction to Decision Theory and Decision Making Under Certainty
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This document introduces decision theory and decision-making under certainty. It defines decision theory as a descriptive and prescriptive approach to classify levels of knowledge when making decisions. Under certainty, a decision maker has perfect information about outcomes for each alternative, allowing them to choose the best option. An example is provided where a manufacturer must choose between two machines, M1 and M2, to process an order of 1000 units. All costs are known for each machine's setup time, tooling costs, and machining time per unit. Calculations show the total cost is lower to use machine M2, so it is the best choice under the certain conditions given.
Inroduction to Decision Theory and Decision Making Under Certainty
- 1. INTRODUCTION TO DECISION THEORY AND DECISION - MAKING UNDER CERTAINTY Shri Sa’d Vidya Mandal Institute of technology, Bharuch Subject : Operations Research Enrollment no : 130450119043 130450119047 Guided by : Ass. Professor and HOD, Mr. S. J. Thanki SVMIT, Bharuch
- 2. CONTENT Introduction to decision theory Decision making under certainty
- 3. INTRODUCTION TO DECISION THEORY The success or failure that an individual or organization experiences, depends to a large extent, on the ability of making acceptable decisions on time. To arrive at such a decision, a decision maker needs to enumerate feasible and viable courses of action (alternatives or strategies), the projection of consequences associated with each course of action, and a measure of effectiveness (or an objective) to identify the best course of action.
- 4. INTRODUCTION TO DECISION THEORY Decision Theory is both descriptive and prescriptive business modeling approach to classify the degree of knowledge and compare expected outcomes due to several courses of action. The degree of knowledge is divided into four categories : o Certainty o Uncertainty o Risk o Ignorance
- 5. INTRODUCTION TO DECISION THEORY In day to day life everyone is taking decision under different scenarios as discussed below : Decision making under certainty If there is complete certainty about future, it is possible to take the best decision as there is only one state of nature exist for each alternatives. This decision environment is called decision making under
- 6. INTRODUCTION TO DECISION THEORY Decision making under uncertainty If there is more than one states of nature exist, the uncertainty about the event to happen increase and hence the decision gets affected as there is insufficient knowledge about the probabilities of any event to happen. This decision environment is called decision making under
- 7. INTRODUCTION TO DECISION THEORY Decision making under risk In the above condition, if the probabilities of event to happen is known, then calculated risk is taken for each states of nature which is existing and appropriate decision is taken. This decision environment is called decision making conditions of risk. Ignorance Uncertainty Risk Certainty Increasing Knowledge
- 8. DECISION MAKING UNDER CERTAINTY In this decision making environment, decision maker has complete knowledge (perfect information) of outcome due to each decision alternative (course of action). Example of decision under certainty : A manufacturer has two different kinds of machines – M1 and M2. He has received an order which can processed either
- 9. Cont… The following data is available : Which of the two machines will you choose to do the job if the order quantity is 1000 numbers? Machine M1 M2 Set up time (min) 90 120 Tooling up cost Rs.600 Rs.1800 Machining time per piece (min) 12 4 Machine cost per hr. Rs.40 Rs.90
- 10. Answer Let’s first we consider two machines M1 and M2 which is shown in figure.
- 11. Cont… Step 1 : Find the Total Cost for both machine Total Cost = Set up Cost + Tooling up Cost + Machining Cost o Set up Cost for 60 min the cost is 40 Rs. ∴ for 90 min the cost is (?) Rs. 𝑥 = 90∗40 60 = 60 𝑅𝑠.
- 12. Cont… o Tooling up Cost = 600 Rs. o Machining Cost for producing 1 piece required time is 12 min. ∴ for producing 1000 piece time required =12000 min. (Same as set up time ) ∴ 𝑥 = 40 ∗12000 60 = 8000 𝑅𝑠.
- 13. Cont… ∴ Total Cost = Set up Cost + Tooling up Cost + Machining Cost ∴ Total Cost = 60 + 600 + 8000 For machine M1, ∴ Total Cost = 8660 Rs. Same method is apply for Machine M2 and find the Total Cost. For machine M2, ∴ Total Cost = 7980 Rs. ∴ Machine M2 is more suitable machine for doing this job.
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