Qt decision theory
- 1. Decision theory Decision-making means a process which results in the selection from a set of alternative courses of action, that course of action which is regarded to meet the objectives of the decision problem more satisfactorily as compared to others. Process of decision making includes: Defining the problem, Analysis of the problem, Identification of alternatives, Evaluation of alternatives, Decision environment.
- 2. Terminology: Acts or alternatives- denoted by a1,a2,a3. Events- denoted by e1,e2,e3. Pay off-measures the net benefit to decision maker, which results from a given combination. Pay-off table- various pay-off can be put in a shape of table to form a pay off table. Opportunity loss or regret-the difference between pay off realized and the maximum payoff which could have been realized if another strategy was chosen.
- 3. SITUATIONS OF DECISION MAKING DECISION-MAKING UNDER CERTAINTY DECISION-MAKING UNDER UNCERTAINTY DECISION-MAKING UNDER RISK
- 4. Decision making under certainty: In decision making under certainty, the decision maker knows with certainty the consequences of every alternative. The decision maker has to choose the alternative with the maximum pay-off in terms of utility under event which will occur. The main techniques used in it : Liner programming Input-output analysis Inventory models Goal programming Break-even analysis etc.
- 5. Decision making under uncertainty: The choice of a decision is very largely based on company’s policy, experience and the judgment of the decision maker. The methods used in it are: Maxi-max criterion: under this criterion it is assumed, the decision maker is optimistic. First the maximum outcome within every alternative is located and then the alternative with maximum pay-off is selected. Maxi-min criterion: under this method it is assumed that the decision maker is pessimist and chooses the strategy which gives the highest minimum pay-off.
- 6. Contd.. Mini-max criterion: under this criterion the decision maker would select the strategy in which the maximum regret is the lowest. Coefficient of optimism criterion-Hurwicz criterion- under this criterion the decision maker’s degree of optimism is represented by α(alpha), the coefficient of optimism varying between 0 and 1. Laplace criterion: under this criterion three steps are followed, assigning equal opportunity to each event, calculating the expected pay-offs, selecting the strategy with maximum expected pay-off.
- 7. Decision making under risk: Under this condition, the decision maker faces several events and he cannot predict the outcome of an event. Under this the following decision criterions are used: Expected monetary value criterion(EMV):under this criterion the decision maker chooses that strategy which has highest EMV. Expected opportunity loss criterion(EOL): under this criterion the expected opportunity loss is minimized. Expected value of perfect information(EVPI):under this it is assumed that the decision maker has authentic and perfect information available. EVPI=EPPI-EMV=MINIMUM EOL
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