nature of the data or both. There are two broad categories of decision problems: decision makingunder certainty and decision making under uncertainty.
ELEMENTS OF DECISION MAKINGDecision Maker:
The entity responsible for making the decision. This may be a single person, acommittee, company, and the like. It is viewed here as a single entity, not a group.
A finite number of possible decision alternatives or courses of action available tothe decision maker. The decision maker generally has control over the specification anddescription of the alternatives. These alternatives are also called courses of action (actions, actsor strategies) and are known to the decision-maker.
States of Nature:
The scenarios or states of the environment that may occur but are not under control of the decision maker. These are the circumstances under which a decision is made. Thestates of nature are mutually exclusive events and exhaustive. This means that one and only onestate of nature is assumed to occur and that all possible states are considered.
Payoff or Outcome:
Outcomes are the measures of net benefit, or payoff, received by thedecision maker. This payoff is the result of the decision and the state of nature. Hence, there is a payoff for each alternative and outcome pair. The measures of payoff should be indicative of thedecisions maker’s values or preferences. The payoffs are generally given in a payoff matrix inwhich a positive value represents net revenue, income, or profit and a negative value representsnet loss, expenses, or costs. This matrix yields all alternative and outcome combinations andtheir respective payoff and is used to represent the decision problem.
General form of payoff matrix
1 2 n12
Courses of Action(Alternatives)States of Nature Probability S S SNN
1 11 12 1n2 21 22 2nm m m1 m2 mn
p pp pp pp p N p pp p
STEPS OF DECISION MAKING PROCESS
The decision making process involves the following steps:1.Identify and define the problem.2.Listing of all possible future events, called states of nature, which can occur in thecontext of the decision problem. Such events are not under the control of decision-maker because these are erratic in nature.3.Identification of all the courses of action (alternatives or decision choices) which areavailable to the decision-maker. The decision-maker has control over these courses of action.