its a presentation about the various alternatives for decision making under uncertainty in operation research

1. Statistical
By;
Suresh T S
I PG M.Com , 314
Decision Theory

2. The Decision-Making Process
Thursday, August 6, 2015 Operations Research 2
Problem Decision
Quantitative Analysis
Logic
Historical Data
Marketing Research
Scientific Analysis
Modeling
Qualitative Analysis
Emotions
Intuition
Personal Experience
and Motivation
Rumors

3. Steps to Good Decision Making
1. Define problem and influencing factors.
2. Establish decision criteria.
3. Select decision-making tool (model).
4. Identify and evaluate alternatives using decision-making tool (model).
5. Select best alternative.
6. Implement decision.
7. Evaluate the outcome.
Thursday, August 6, 2015 Operations Research 3

4. Decision Theory
Associated Terms:
Alternative (Acts)
Course of action or choice. Decision-maker chooses among
alternatives.
State of nature (Events)
An occurrence over which
the decision maker has no control.
Thursday, August 6, 2015 Operations Research 4

5. 1) Decision making under certainty
The outcome of a decision alternative is known
(i.e., there is only one state of nature.)
2) Decision making under risk
The outcome of a decision alternative is not
known, but its probability is known.
3) Decision making under uncertainty
The outcome of a decision alternative is not known,
and even its probability is not known.
Thursday, August 6, 2015 Operations Research 5
Types of Decision Making

6. Decision Making under Uncertainty
 The outcome of a decision alternative is not known,
and even its probability is not known.
Thursday, August 6, 2015 Operations Research 6
 A few criteria
(approaches) are
available for the
decision makers to
select according to
their preferences
and personalities

7. Decision Making Under Uncertainty
1. Maximax Criterion
2. Maximin Criterion
3. Minimax Criterion
4. Laplace Criterion (Equally likelihood)
5. Hurwiczalpha Criterion ( Rationality or Realism)
Thursday, August 6, 2015 Operations Research 7

8. Criterion 1: Maximax (Optimistic)
An adventurous and aggressive decision maker may
choose the act that would result in the maximum payoff
possible
 Step 1 - Pick maximum payoff of each alternative.
 Step 2 - Pick maximum of those maximums in Step 1;
its corresponding alternative is the decision.
 This is viewed as an optimistic approach, “Best of
bests”.
Thursday, August 6, 2015 Operations Research 8

9. Criterion 2: Maximin (Pessimistic)
This is also called Waldian criterion. This criterion of
decision making stands for choice between alternative
courses of action assuming pessimistic view of nature
• Step 1 - Pick minimum payoff of each alternative
• Step 2 - Pick the maximum of those minimums in Step 1,
its corresponding alternative is the decision
This is viewed as a pessimistic approach, “Best of worsts”
Thursday, August 6, 2015 Operations Research 9

10. Criterion 3: Hurwicz (Realism)
This method is a combination of Maximin and Maximax criterion.
Also known as criterion of rationality.
neither too optimistic nor too pessimistic
• Step 1 - Calculate Hurwicz value for each alternative
• Step 2 - Pick the alternative of largest Hurwicz value as the
decision.
Hurwicz value of an alternative
= (row max)() + (row min)(1-)
where  (01) is called coefficient of realism.
Thursday, August 6, 2015 Operations Research 10

11. Criterion 4: Equally Likely
The decision maker makes a simple assumption that each state
of nature is equally likely to occur & compute average payoff
for each. Choose decision with highest average payoff.
Also known as Laplace criterion
• Step 1 - Calculate the average payoff for each alternative.
• Step 2 - The alternative with highest average if the decision.
Thursday, August 6, 2015 Operations Research 11

12. Criterion 5: Minimax Regret
Application of the minimax criterion requires a table of losses or table
of regret instead of gains.
Regret is amount you give up due to not picking the best alternative in
a given state of nature.
Regret = Opportunity cost = Opportunity loss
• Step 1 - Construct a ‘regret table’,
• Step 2 - Pick maximum regret of each row in regret table,
• Step 3 - Pick minimum of those maximums in Step 2, its
corresponding alternative is the decision.
Thursday, August 6, 2015 Operations Research 12

13. Thursday, August 6, 2015 Operations Research 13