This ppt provides the basic terminologies which involved in decision making

1. Decision
Theory
SAGAR KHAIRNAR

2. Decision Making
A decision may be defined as the selection of the action by the decision maker which is considered to
be the best according to some predetermined standard from amongst the available options

3. Steps in Decision Making
STEP 1 STEP 2 STEP 3 STEP 4
Identification of
all possible
outcomes called
as state of nature
or events
Identification of
all courses of
action called as
acts
Determination of
Payoff Function
Choosing from
among the
alternatives, the
best possible
action on the
basis of some
criterion

4. Terminologies
 The Decision Maker
The decision maker may be an individual or a group of individuals who is responsible for
making the selection of the course of action from a set of possible courses of action
 State of Nature
They are also known as events. States of Nature are various possible outcomes or occurrences
which are outside the decision makers control and they determine the level of success for a
given act
 Course of Action or Acts
The acts are alternative course of action or strategies that are available to the decision maker.
The decision maker has control over the choices of these acts.

5. Terminologies
 Payoff
It measures the net benefit resulting from each combination of a state of nature and a course
of action . The payoff values are also known as conditional profit values or conditional
economic consequences.
 Payoff Table
A tabular arrangement of conditional payoff values is known as payoff matrix
Suppose there are m possible states of nature or events 𝑆1, 𝑆2, 𝑆3, … , 𝑆 𝑚
And n course of action or acts or strategies 𝐴1, 𝐴2, 𝐴3, … , 𝐴 𝑛
𝑃𝑖𝑗 = the payoff corresponding to the strategy 𝐴𝑗 of the decision maker under the state of nature 𝑆𝑖
Totally there are mn payoff values

6. Terminologies
State of
Nature
Acts
𝐴1 𝐴2 𝐴3 --- ---- 𝐴 𝑛
𝑆1 𝑃11 𝑃12 𝑃13 𝑃1𝑛
𝑆2 𝑃21 𝑃22 𝑃23 𝑃2𝑛
𝑆3 𝑃31 𝑃32 𝑃33 𝑃3𝑛
-----
𝑆 𝑚 𝑃 𝑚1 𝑃 𝑚2 𝑃 𝑚3 𝑃𝑚𝑛

7. Types of Decision Making Environments
1 2 3 4
Decision making
under certainty
Decision making
under uncertainty
Decision making
under risk
Decision making
under conflict

8. Decision Making Under Certainty
In this case the decision maker has the complete knowledge of the consequences of every alternative
or decision choice. Here the decision maker presumes hat only one state of nature is relevant for this
purpose. He identifies this state of nature , takes it for granted and presumes complete knowledge as
to its occurrence.

9. Decision Making Under Uncertainty
In this case the decision maker faces multiple state of nature but has no means to arrive aat the
probability values to the likelihood of occurrences of these state of nature .

10. Decision Making Under Risk
In this case the decision maker has to faces several state of nature. But he has some knowledge or
experience to assign probabilities value to the likely occurrences of these states of nature. The
objective is to maximize the expected profit or minimize the expected opportunity loss.