DECISION THEORY

Presentation by Martha Dsouza. Aarti Asrani Urja ShahPooja BhaljaSuchita NevrekarPallavi Karande

Introduction

Decision making is the essence of management, it is the process of making decision calls for identifying the alternatives,gathering all the relevent information about them and selecting the best alternative on the basis of some criterion.

Features of Decision Theory

• Development of Payoff Matrix using given information, derivation of regret Matrix.

• Principles on the basis of which decision can be made.

• Incorporation of Sample Information into the Decision Making Process.

• Construction of Utility Scale in order to be used as a tool for reaching Decisions.

Sections of Decision Making

1. One Stage Decision Making Problem2. Multi Stage Decision Making

Problem :Decision Tree3. Utility Theory: Utility as Basis for Decision

Making

One Stage Decision Making Problem1. Developing payoff & Regret Table:

A pay-off is a conditional value- a conditional profit, loss or maybe, a conditional cost. A pay-off table represents the matrix of the conditional values associated with all the

possible combinations of the acts and events. Regret is defined as the amount of payoff foregone by not adopting the optimal course of

action- that which would give the highest payoff for each possible event.

2. Decision Rules:A. DECSION UNDER UNCERTAINTY: The decision situation where there is no way in which the

decision maker can assess the probabilities of the various states of nature are called decision under uncertainty.

Laplace Principle: The Laplace Principle is based on the simple philosophy that if we are uncertain about the

various events then we may treat them as equally probable. Maximin or Minimax Principle: This principle is adopted by pessimistic decision makers who are conservative in their

approach. It involves choosing the best profit from the set of worst profits.

Maximax or Minimin Principle: The Maximax Principle is optimist’s principle of choice. It

suggests that for each strategy, the maximum profit should be considered and the strategy with which the highest of these values is associated should be chosen.

Hurwicz Principle: The Hurwicz Principle of decision making stipulates that a

decision makers view may fall somewhere between the extreme pessimism of the maximum principle and the extreme optimism of the maximax principle.