This document discusses decision theory and different types of decision making situations. It describes decision making as selecting the alternative course of action that best meets the objectives of the problem. The types of decision making situations covered are decisions under certainty, uncertainty, and risk. Decision making under certainty involves known consequences, while uncertainty is based on judgment and experience. Risk-based decisions involve predicting outcomes of events. The document provides examples of criteria used to evaluate alternatives under each type of decision making situation, such as expected monetary value and opportunity loss.

1. Decision theory
 Decision-making means a process
which results in the selection from a set
of alternative courses of action, that
course of action which is regarded to
meet the objectives of the decision
problem more satisfactorily as compared
to others.
 Process of decision making includes:
Defining the problem, Analysis of the
problem, Identification of alternatives,
Evaluation of alternatives, Decision
environment.

2. Terminology:
 Acts or alternatives- denoted by a1,a2,a3.
 Events- denoted by e1,e2,e3.
 Pay off-measures the net benefit to
decision maker, which results from a given
combination.
 Pay-off table- various pay-off can be put in
a shape of table to form a pay off table.
 Opportunity loss or regret-the difference
between pay off realized and the maximum
payoff which could have been realized if
another strategy was chosen.

3. SITUATIONS OF DECISION
MAKING
DECISION-MAKING
UNDER CERTAINTY DECISION-MAKING
UNDER
UNCERTAINTY
DECISION-MAKING
UNDER RISK

4. Decision making under
certainty:
 In decision making under certainty, the
decision maker knows with certainty the
consequences of every alternative. The
decision maker has to choose the
alternative with the maximum pay-off in
terms of utility under event which will occur.
The main techniques used in it :
 Liner programming
 Input-output analysis
 Inventory models
 Goal programming
 Break-even analysis etc.

5. Decision making under
uncertainty:
 The choice of a decision is very largely
based on company’s policy, experience and
the judgment of the decision maker. The
methods used in it are:
 Maxi-max criterion: under this criterion it is
assumed, the decision maker is optimistic.
First the maximum outcome within every
alternative is located and then the
alternative with maximum pay-off is
selected.
 Maxi-min criterion: under this method it is
assumed that the decision maker is
pessimist and chooses the strategy which
gives the highest minimum pay-off.

6. Contd..
 Mini-max criterion: under this criterion the
decision maker would select the strategy in
which the maximum regret is the lowest.
 Coefficient of optimism criterion-Hurwicz
criterion- under this criterion the decision
maker’s degree of optimism is represented
by α(alpha), the coefficient of optimism
varying between 0 and 1.
 Laplace criterion: under this criterion three
steps are followed, assigning equal
opportunity to each event, calculating the
expected pay-offs, selecting the strategy
with maximum expected pay-off.

7. Decision making under risk:
Under this condition, the decision maker faces
several events and he cannot predict the outcome
of an event. Under this the following decision
criterions are used:
 Expected monetary value criterion(EMV):under this
criterion the decision maker chooses that strategy
which has highest EMV.
 Expected opportunity loss criterion(EOL): under
this criterion the expected opportunity loss is
minimized.
 Expected value of perfect information(EVPI):under
this it is assumed that the decision maker has
authentic and perfect information available.
EVPI=EPPI-EMV=MINIMUM EOL

8. THANK YOU