This document discusses different types of decision making environments including certainty, risk, uncertainty, and conflict. It defines key concepts in decision theory like courses of action, states of nature, and payoffs. It also describes different types of decisions and provides details on decision making under certainty, risk, and uncertainty. Decision making under uncertainty involves criteria like maximax, maximin, salvage regret, Hurwicz, and Laplace criteria.

1. LECTURE-1
LINEAR PROGRAMMING-508
Decision theory
State of decision
•Certainty
•Risk
•Uncertainty
•Conflict

2.  Making decisions is an integral and continuous aspect of
human life
 Decision is an essential part of planning.
 Decision theory represents a generalized approach to
decision making.
 It enables a decision maker to
1) Analyze a set of complex situations with many
alternatives and many different possible consequences.
2) Identify a course of action consistent with basic
economic and psychological decision of the decision
maker.

3. DECISION MAKING ENVIRONMENTS
 Certainty
 Uncertainty
 Risk
 Conflict
The domain of decision analysis models falls between
two extreme cases i.e Deterministic and Uncertainty
between these two lies the problem of risk.

4. DIFFERENT TYPES OF DECISIONS
 Strategic –external environment of organization
 Administrative-optimal allocation of resources .
structuring and acquisition of resources so as to
optimize.
 Operating cost –day to day decisions.

5. DEFINITIONS
 Courses of action- decision making problems deals with
selection of a single act from a set of alternative acts . if
two or more alternative courses of action occur then
decision making is necessary to select only one course of
action.
 States of nature- when there are many possible
outcomes of an event .one cannot predict what will
happen. It is only in terms of probability one can forecast.
Decision maker has no direct control on occurrence of
particular future event.

6.  Preference or volume system- the criteria used by
decision maker to choose best alternative.
 Pay off- the effectiveness associated with specified
combination of courses of action and states of nature.
A1 A2 A3 A4 ……Ai
 S1 A1S1 A2S2 ……………………
 S2 …………….……………………..
 S3 …………………..……………….
 . ……………………………........
 . .………………………………….
 Sj ………………………………..AiSj

7.  Opportunity loss table- loss incurred due to failure of
not adopting most favorable course of action or strategy
.this is found separately for each state of nature.

8. DECISION MAKING UNDER CERTAINTY
 Decision maker have all the information of
consequence of every alternative or decision choice
with certainty . One can predict the outcome of
each alternative course of action exactly. here
optimal payoff is available. Linear programming
technique is commonly used.

9. DECISION UNDER RISK
 Decision maker does not know which state of nature will
occur but can say probability of the occurrence of each
state .i.e expected value criteria and expected
opportunity loss criteria.
 One assumes that there exists no. of possible future
states of nature Nj and each Nj has probability Pj
occurring and there may not be one future state that
results in the best outcome for all alternatives Aj
 Outcomes = Nj * Aj = Oij
 Expected value = Oij*Pj

10.  The highest value Pj is defined as some of the products
of each outcome Oij times the Pj associated states of
nature Nj occurs. It is the best alternative.
 Expected opportunity loss criteria- also known as regret
criteria this utilizes opportunity loss to minimize the
regret.
Expected opportunity loss criteria = Oij*Pj → regrets

11. DECISION MAKING UNDER UNCERTAINTY
 Maximax criteria
 Maximin criteria
 Salvage regret criteria
 Hurwicz criteria
 Laplace criteria

12.  Maximax criteria- based on the assumption of optimistic
choosing alternative maximum of maximum pay offs.
 Maximin criteria – based on assumption of pessimistic
choosing maximum out of min pay offs
 Salvage regret criteria-also known as minmax.this
criteria examines the regret or the opportunity loss
resulting when the particular situation occurs and the pay
offs of selected alternatives is the smaller than the pay off
that could have been attained with that particular
situation .here pay off matrix is converted into regret
matrix. The decision maker finds the maximum regret for
each strategy and selects the one with smallest regret .

13.  Hurwicz criteria- its compromise between maximax and
maximin criteria. No equal weightage is given here
because of the co-efficients.
α = co-efficient of optimism
1-α= co-efficient of pessimism
The maximum payoff will be multiplied by co-efficient of
optimism and vice versa.
 Laplace criteria - also known as equally likelyhood
criteria. Here equal weightage is given. the possibility of
occurrence of each states of nature has one third chance
of occurrence .Also known as Principle of insufficient
criteria. Each decision alternative will be assigned an
average payoffs value.