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Decision Theory

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BhushanPhirke

This document summarizes a presentation on decision theory given by Bhushan Vijay Phirke to the MBA program at Rajarshi Shahu College of Engineering on April 17, 2020. It defines decision theory, outlines the six steps in the decision theory process, and describes key concepts like problem formulation, payoff tables, decision environments, and optimization criteria like optimism, pessimism, and regret. It concludes that decision theory provides a logical framework to help managers determine the most beneficial course of action when facing uncertainty.

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JSPM’s Rajarshi Shahu College of Engineering Tathawade , Pune:33 Presentation on Topic: “ Decision Theory ” Department of MBA Date: 17.04.2020 Presented By : Name of student: Bhushan Vijay Phirke Roll Number: 191415 Subject : Operation Research (MBA-Sem II)
Decision Theory Meaning:- - is a methodology for making management decisions which constitutes a particular branch of operations research/decision science. - - As the analysis of decision situations in which certainty cannot be assumed. Most of the time decision maker must choose among several different courses of action in an attempt to optimize his decision process.
The Six Steps in Decision Theory 1. Clearly define the problem at hand 2. List the possible alternatives 3. Identify the possible outcomes 4. List the payoff or profit of each combination of alternatives and outcomes 5. Select one of the mathematical decision theory models 6. Apply the model and make your decision
Problem Formulation • A decision problem is characterized by decision alternatives, states of nature, and resulting payoffs. • The decision alternatives are the different possible strategies the decision maker can employ. • The states of nature refer to future events, not under the control of the decision maker, which will ultimately affect decision results. • States of nature should be defined so that they are mutually exclusive and contain all possible future events that could affect the results of all potential decisions.
Payoff tables • The consequence resulting from a specific combination of a decision alternative and a state of nature is a payoff. • A table showing payoffs for all combinations of decision alternatives and states of nature is a payoff table. • Payoffs can be expressed in terms of profit, cost, time, distance or any other appropriate measure.
Fundamentals of decision theory
Decision Environments • Certainty - Environment in which relevant parameters have known values • Risk - Environment in which certain future events have probable outcomes • Uncertainty - Environment in which it is impossible to assess the likelihood of various future events
Optimism (Maximax or Minimin criterion) • Choose the alternative with the best possible payoff • Locate the maximum or minimum payoff values corresponding to each alternatives • The maximax is 7000 ,hence the company should adopt strategy S1
Pessimism Maximin or Minimax criterion • Choose the alternative with the best of the worst possible payoffs • Locate the minimum payoff values corresponding to each alternatives • The act/decision with higher minimum value is 3000 ,hence the company should adopt S3
Regret (Salvage rule) • This rule represents a pessimistic approach. • The opportunity loss reflects the difference between each payoff and the best possible payoff in a column (it can be defined as the amount of profit foregone by not choosing the best alternative for each state of nature). • For each course of action identify the maximum regret value, record this no in a row • Select the course of action with Smallest anticipated opportunity loss value.
Decision Theory
Elements of Decision Theory • States of nature: The states of nature could be defined as low demand and high demand. • Alternatives: It could decide to build a small, medium, or large type of organization. • Payoffs: The profit for each alternative under each potential state of nature is going to be determined.
Conclusion • Decision theory is a Structure of logical and mathematical concepts which is intended to assist managers to formulate rules that may lead to a most beneficial course of action under the given circumstances. Decision theory divides decisions into three categories that include Decisions under certainty; where a manager has far too much information to choose the best alternative
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Decision Theory

  • 1. JSPM’s Rajarshi Shahu College of Engineering Tathawade , Pune:33 Presentation on Topic: “ Decision Theory ” Department of MBA Date: 17.04.2020 Presented By : Name of student: Bhushan Vijay Phirke Roll Number: 191415 Subject : Operation Research (MBA-Sem II)
  • 2. Decision Theory Meaning:- - is a methodology for making management decisions which constitutes a particular branch of operations research/decision science. - - As the analysis of decision situations in which certainty cannot be assumed. Most of the time decision maker must choose among several different courses of action in an attempt to optimize his decision process.
  • 3. The Six Steps in Decision Theory 1. Clearly define the problem at hand 2. List the possible alternatives 3. Identify the possible outcomes 4. List the payoff or profit of each combination of alternatives and outcomes 5. Select one of the mathematical decision theory models 6. Apply the model and make your decision
  • 4. Problem Formulation • A decision problem is characterized by decision alternatives, states of nature, and resulting payoffs. • The decision alternatives are the different possible strategies the decision maker can employ. • The states of nature refer to future events, not under the control of the decision maker, which will ultimately affect decision results. • States of nature should be defined so that they are mutually exclusive and contain all possible future events that could affect the results of all potential decisions.
  • 5. Payoff tables • The consequence resulting from a specific combination of a decision alternative and a state of nature is a payoff. • A table showing payoffs for all combinations of decision alternatives and states of nature is a payoff table. • Payoffs can be expressed in terms of profit, cost, time, distance or any other appropriate measure.
  • 7. Decision Environments • Certainty - Environment in which relevant parameters have known values • Risk - Environment in which certain future events have probable outcomes • Uncertainty - Environment in which it is impossible to assess the likelihood of various future events
  • 8. Optimism (Maximax or Minimin criterion) • Choose the alternative with the best possible payoff • Locate the maximum or minimum payoff values corresponding to each alternatives • The maximax is 7000 ,hence the company should adopt strategy S1
  • 9. Pessimism Maximin or Minimax criterion • Choose the alternative with the best of the worst possible payoffs • Locate the minimum payoff values corresponding to each alternatives • The act/decision with higher minimum value is 3000 ,hence the company should adopt S3
  • 10. Regret (Salvage rule) • This rule represents a pessimistic approach. • The opportunity loss reflects the difference between each payoff and the best possible payoff in a column (it can be defined as the amount of profit foregone by not choosing the best alternative for each state of nature). • For each course of action identify the maximum regret value, record this no in a row • Select the course of action with Smallest anticipated opportunity loss value.
  • 12. Elements of Decision Theory • States of nature: The states of nature could be defined as low demand and high demand. • Alternatives: It could decide to build a small, medium, or large type of organization. • Payoffs: The profit for each alternative under each potential state of nature is going to be determined.
  • 13. Conclusion • Decision theory is a Structure of logical and mathematical concepts which is intended to assist managers to formulate rules that may lead to a most beneficial course of action under the given circumstances. Decision theory divides decisions into three categories that include Decisions under certainty; where a manager has far too much information to choose the best alternative