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Decision Theory

Decision Theory

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Published by nishuppt
Nishu
Nishu

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Published by: nishuppt on Jan 19, 2010
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12/01/2010

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IX. Decision Theory
Techniques used to find optimal solutionsin situations where a decision maker isfaced with several alternatives (Actions)and an uncertainor risk-filled future(Events or States of Nature). Thetechniques can utilize knowledge of thepossible actions that the decision makercan take, probabilities that the events willoccur, and the outcome (payoff) associatedwith each combination of action andevent.A.Basic Definitions
Act/Action-Choice available to the decision maker.Outcome/Payoff-The result of an act.Event/State of Nature -Uncontrollable occurrence thatwill affect the payoff associated with an action.Payoff Table -Tabular display of actions, events, andassociated outcomes. As an example:Payoff TableStates of NatureDecisionSales Sales SalesAlternatives Drop (E
1
) Constant (E
 
2
) Increase (E
 
3
)Purchase NewEquipment(A
1
)106085Not Purchase NewEquipment (A
 
2
)304060
 
B.Approaches to Decision Makin
1.Decision Theoretic approaches for situations in whichprobabilities associated with the events are not available:-Optimistic (Maximax) Decision Making: Choose theact associated with the largest possible outcome.-Conservative (Maximin) Decision Making: Choose theact associated with the largest minimum outcome.-MinimaxRegret Decision Making: Calculate theregret table bya)finding the maximum payoff associated with eachevent;b)subtracting every outcome from a given event fromthe corresponding maximum payoff; thenc)choosing the act associated with the smallestmaximum regret.Example -Find the Optimistic, Conservative, andMinimaxRegret acts associated with the following payoff table.Payoff Table .Events .DecisionSales Sales Sales MaximumAlternatives Drop Constant Increase Payoffs .Purchase NewEquipment10608585Do Not PurchaseNew Equipment304060 60 .Optimistic (Maximax) Decision -Purchase NewEquipment (maximum payoff of 85);
 
Example -Find the Optimistic, Conservative, andMinimaxRegret acts associated with the following payoff table.Payoff Table .Events .DecisionSales Sales Sales MinimumAlternatives Drop Constant Increase Payoffs .Purchase NewEquipment10608510Do Not PurchaseNew Equipment304060 30 .Conservative (Maximin) Decision -Do not PurchaseNew Equipment (largest minimum payoff -30);
 
Example -Find the Optimistic, Conservative, andMinimaxRegret acts associated with the following payofftable.Regret Table .Events .DecisionSales Sales Sales MaximumAlternatives Drop Constant Increase Regret .Purchase NewEquipment200020Do Not PurchaseNew Equipment02025 25.MinimaxRegret Decision Making -Purchase NewEquipment (maximum regret of 25).

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