2. CERTAINITY
By conditions of certainity ,we mean that the decision maker can specify
the consequences of a particular decision ,or act . Of course , certainity about
future events is difficult and managerial decisions must be made in awareness
that future conditions may vary widely from those contemplated when the
decision is being made . Nevertheless , many managerial decisions may be
made in conditions approaching cetainity.
Decision –making under certainity may seem trival ,but as the number of
possible alternatives increases ,finding the one with the highest pay –off
becomes more and more difficult .
3. RISK
In decision –making under conditions of risk , the consequences of a particular
decision cannot be specified with known probability values . The value of the
probability associated with the event is a measure of the likelihood of the
occurrence of that event .
Evaluation of alternatives is done by calculating the expected pay off associated
with each alternative. The expected pay off associated with each alternative is the
sum of the value of each possible outcome times its associated probability . As a
decision- making ,the use of this approach maximises the expected pay off.
4. UNCERTAINITY
More prevalent than either conditions of certainity or risk are conditions of uncertainity .
Uncertainity exists when the decision-maker does not know the probabilities associated with the
possible outcomes , through he has been able to identify the possible outcomes and their related
pay offs . This is not the same as decision-making under conditions of complete ignorance , in
which even the possible outcomes and their pay-off cannot be identified . Since pay offs are
identified but probabilities are unknown under conditions of uncertainity , the criterion of
maximising the expected pay off cannot be used in evaluating the decision alternatives , or acts
.Three other bases that can be used , however are the maximin , maximax and minimax regret
citeria .
5. MAXIMIN
If the manufacturer is pessimistic or cautious in
his approach , he can choose that decision act which
maximises the minimum pay off . This is called the
maximin criterion .
6. MAXIMAX
If the manufacturer is optimistic , he may choose
that decision act which maximises the maximum pay
off . This is called maximax.
7. MINIMAX REGRET
The third possible criterion , called minimax regret , looks
at the decision problem from the point of view that is niether
pessimistic nor as optimistic as the maximin and maximax
criteria , respectively. As the name implies the minimax –regret
criterion is the one by which the decision maker minimises the
maximum regret that can occur , no matter what the outcome .
