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Decision Making Conditions

Decision Making Conditions

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Published by: sorryhasan on Jan 01, 2010
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05/13/2013

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Decision-making conditions :
Decision is made under three conditions: certainty, risk and uncertainty.
Certainty :
When we have a feeling of complete belief or complete confidence in a single answer tothe question is called certainty e.g. Decisions such as deciding on a new carpet for theoffice or installing a new piece of equipment or promoting an employee to a supervisory position are made with a high level of certainty.While there is always some degree of uncertainty about the eventual outcome of suchdecisions but there is enough clarity about the problem, the situation and the alternativesto consider the conditions to be certain.
Risk:
A state of uncertainty where some possible outcomes have an undesired effect or significant loss.
Measurement of risk :
A set of measured uncertainties where some possible outcomes are losses, and themagnitudes of those losses - this also includes loss functions over continuous variables.
Uncertainty :
The lack of certainty, A state of having limited knowledge where it is impossible toexactly describe existing state or future outcome, more than one possible outcome.
Measurement of uncertainty:
A set of possible states or outcomes where probabilities are assigned to each possiblestate or outcome - this also includes the application of a probability density function tocontinuous variables.
 
Example :
Political Systems Inc. (PSI), a newly formed computer service firm specializing ininformation services such as surveys and data analysis for individuals running for  political office.
PSI
is in the final stage of selecting a computer system for its Midwest branch located in Chicago .While the firm has decided on a computer manufacturer, it iscurrently attempting to determine the size of the computer system that would be the mosteconomical to lease.
Solution by using Payoff Tables :
The first step is to identify the alternatives. For 
PSI,
the final decision will be lease
 
oneof the three computer systems which differ in size and capacity. The three differentalternatives denoted by d1, d2 and d3.
 
D1=lease the large computer systemsD2= lease the medium sized computer systemsD3= lease the small computer systemsThus the PSI states of nature denoted S1 and S2, are as follows:S1= high customer acceptance of PSI services.S2= low customer acceptance of PSI services.For example, what profit would PSI experience if the firm has decided to lease the largecomputer system D1 and market acceptance was high S1? What profit would PSIexperience if the firm has decided to lease the large computer system D1 and marketacceptance was low S2? And so on.
 Payoff Table for the PSI Computer Leasing Problem
DecisionAlternativesStates of NatureHigh AcceptanceLow AcceptanceS1S2Large
 
Systemd1
200000-20000
Medium Systemd2
15000020000
Small Systemd3
10000060000
 
Criteria for Decision Making under Uncertainty without using Probabilities :
Three of the most popular criteria available for this case is maximin, maximax, minimax(regret).
Maximin:
The Maximin decision criterion is a pessimistic or conservative approach to arriving at adecision. In this approach the decision maker attempts to maximize the minimum possible profits; hence the term maximin.
 PSI minimum payoff ($) for each decision alternatives
 
 
Minimum Payoff Large Systemd1
-20000
Medium Systemd2
20000
Small Systemd3
60000
Maximax:
Maximax provides an optimistic approach. Using this approach for maximization problems the decision maker selects the decision that maximizes the maximum payoff;hence the name maximax.
 PSI maximum payoff ($) for each decision alternative
 
Maximum Payoff Large Systemd1
200000
Medium Systemd2
150000
Small Systemd3
100000

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