2. 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.
3. 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.
4. Sections of Decision Making
1. One Stage Decision Making Problem
2. Multi Stage Decision Making Problem
:Decision Tree
3. Utility Theory: Utility as Basis for Decision
Making
5. One Stage Decision Making Problem
1. 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.
6. 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.
