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    Decision Theory: By: Russel Villegas and Arnel Tanggaro

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    arnel tanggaro
    Decision theory provides a framework for making rational decisions when facing uncertainty. It involves identifying decision alternatives, possible future states of nature outside one's control, and the payoffs associated with each combination. Payoffs are quantified outcomes that can represent things like profits, costs or other metrics. Together, alternatives, states and payoffs form a payoff table to evaluate choices. Decision environments can involve certainty, risk or uncertainty about outcomes and their likelihoods. Different criteria like optimism, pessimism or regret are used to evaluate choices under uncertainty when probabilities cannot be assigned.

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    Decision Theory: By: Russel Villegas and Arnel Tanggaro

    Uploaded by

    arnel tanggaro
    30 views13 pages
    Decision theory provides a framework for making rational decisions when facing uncertainty. It involves identifying decision alternatives, possible future states of nature outside one's control, and the payoffs associated with each combination. Payoffs are quantified outcomes that can represent things like profits, costs or other metrics. Together, alternatives, states and payoffs form a payoff table to evaluate choices. Decision environments can involve certainty, risk or uncertainty about outcomes and their likelihoods. Different criteria like optimism, pessimism or regret are used to evaluate choices under uncertainty when probabilities cannot be assigned.

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    Decision theory

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    Decision theory provides a framework for making rational decisions when facing uncertainty. It involves identifying decision alternatives, possible future states of nature outside one's control, and the payoffs associated with each combination. Payoffs are quantified outcomes that can represent things like profits, costs or other metrics. Together, alternatives, states and payoffs form a payoff table to evaluate choices. Decision environments can involve certainty, risk or uncertainty about outcomes and their likelihoods. Different criteria like optimism, pessimism or regret are used to evaluate choices under uncertainty when probabilities cannot be assigned.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    30 views13 pages

    Decision Theory: By: Russel Villegas and Arnel Tanggaro

    Uploaded by

    arnel tanggaro
    Decision theory provides a framework for making rational decisions when facing uncertainty. It involves identifying decision alternatives, possible future states of nature outside one's control, and the payoffs associated with each combination. Payoffs are quantified outcomes that can represent things like profits, costs or other metrics. Together, alternatives, states and payoffs form a payoff table to evaluate choices. Decision environments can involve certainty, risk or uncertainty about outcomes and their likelihoods. Different criteria like optimism, pessimism or regret are used to evaluate choices under uncertainty when probabilities cannot be assigned.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 13

    DECISION THEORY

    By: Russel Villegas and Arnel Tanggaro


    Introduction to Decision Theory
    • Decision making is an integral part of management planning, organizing,
    control, and motivation process. The decision maker selects one strategy
    (course of action) over others depending on some criteria, like utility, sales,
    cost or rate of return.

    • Is used whenever an organization or an individual faces a problem of decision


    making or dissatisfied with the existing decisions or when alternative selection
    is specified.
    Problem Formulation
    • A decision problem is characterized by :

    Decision Alternative
    States of nature
    Payoff
    Decision Alternatives

    •Are the different possible strategies the


    decision maker can employ.
    States of Nature
    • Refer to future events, not under the control of the decision maker
    which will ultimately affects decision results.

    • It should be defined so that they are mutually exclusive and contain


    all possible future events that could affect the results of all potential
    decisions.
    Payoff
    • It is the consequence resulting from a specific combination of a decision
    alternative and a state of nature.

    • Payoffs can be expressed in terms of profit, cost, time, distance or any


    other appropriate measure.

    Payoff Table – a table showing payoffs for all combinations of decision


    alternatives and states of nature.
    Fundamentals of decision theory
    Decision States of nature Payoff
    alternatives

    Courses of action or An occurrence over Quantitative measure


    strategies which decision maker of outcome
    has no control
    Example…
    Decision Environment
    • Certainty – Environment in which relevant parameters have known
    values

    • Risk – Environment in which certain future events have probable


    outcomes

    • Uncertainty – Environment in which it is impossible to assess the


    likelihood of various future events
    Risk Vs. Uncertainty
    • Risk
    Must make a decision for which the outcome is not known with certainty
    Can list all possible outcomes & assign probabilities to the outcome

    • Uncertainty
    Cannot list all possible outcomes
    Cannot assign probabilities to the outcome

    • Certainty
     is n environment in which future outcomes or state of nature is known
    Criteria of decision making under
    Uncertainty

    • Optimism (Maximax or Minimin)


    • Pessimism (Maximin or Minimax)
    • Equal Probabilities (Laplace)
    • Coefficient of Optimism (Hurwics)
    • Regret (Salvage)
    END

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