This document discusses probability theory and its implications for decision making under uncertainty. It first provides an overview of probability theory, noting that outcomes cannot always be predicted with certainty for random phenomena. It then gives an example using life expectancy and genetic diseases. The document outlines several approaches to decision making under uncertainty, including expected monetary value, expected opportunity loss, expected profit with perfect information, and marginal analysis. It also discusses maximizing/minimizing criteria and the equally likely decision criterion. Finally, it works through a numerical example comparing product lines under different criteria.

1. Uncertainity and
risks
Prabhat kiran bhandari
Roll no:131 B
BIM 7th

2. Overview of slide
O 1.probability theory
O 2.example
O 3. implication of probability theory in
decision making
O 4.decision making under uncertainity

4. Probability theory
Features
outcome of a
given trial
cannot be
predicted with
certainty
Concerned
with random
phenomena

5. Example
O life expectancy for persons of a certain
age
O genetic disease occurring in a child of
parents having a known genetic makeup

6. Implication of probability
theory in decision making
O Expected monetary value criterion or
expected value criterion
O Expected oppurtunity loss criterion
O Expected profit with perfect information
O Marginal analysis approach

7. Expected monetary value
O Sum of product of pay-off values of each
strategy with assigned probabilities
EMV :payoff* probabilities

8. Expected profit with perfect
information[EPPI]
O Complete information about future regards
O Highest profit can be obtained by
overcoming uncertainities

9. Marginal analysis approach
O Used when no. of alternatives are availiable
O It is made to avoid situation of creating pay off
table and loss table
assumption:expected marginal
profit>=expected maginal loss
Where,expected marginal profit=probability of
selling one additional unit*marginal profit
Expected marginal loss=probability of not selling
one additional unit

10. Decision making under
uncertainity
O Cannot precisely estimate successs or failure of
product
O Outcome is unknown.
Maximax or
minimax
criterion
Maximin or
minimax
criterion
Equally likely
decision
criterion
Criterion or
realism
Criterion or
regret

11. Workout example
Prduct
appearance
full Partial Minimal
Good 8 70 50
Fair 20 45 40
Poor -25 -10 0
Maximum 50 70 50

12. Solution
A)Under maximax criterion the company
should follow partial product line as it has
maximum value of rs.70000.
b)Under maximum criterion company should
follow minimal product line as it has
maximum 0.
Equal likelihood:probality=1/3
Where,no.of states=3

13. Solution of equal likelihood
Prob
abilit
y
Prod
uct
appe
aran
ce
Prod
uct
line
Full Parti
al
Mini
mal
1/3 Good 8 70 50
1/3 Fair 50 45 40
1/3 Poor -25 -10 0
EMV 11 35 30
O Under likelihood
criterion company
should follow partial
product line as it
has maximum
expexted value of
rs.35000

14. Any question????????