Research #2: Decision Theory (Group 2)

Baptista, Jomel
Labanen, Marla
Yaoto, John
Productions or Operations Management
MW 1:30 PM - 3:00 PM
Submitted to: Dr. Ramon A. Victor
January 13, 2016

Executive Summary
This paper covers and explains the decision theory. Decision theory represents a general
approach to decision making. It is suitable for a wide range of operations management decision its
elements and process, what causes poor decision making, steps consisting decision process. The
information for a decision is often summarized in a payoff table, which shows the expected payoffs
for each alternative under the various possible states of nature. Often, failures can be traced to a
combination of mistakes in the decision process, to bounded rationality, or to suboptimization. This
would also aid the reader on how to describe the different environments under which operations
decisions are made; there are three basic categories: certainty, risk, and uncertainty. How to use
techniques that apply decision making theory under uncertainty, how to use the expected-value
approach, be familiarized with a decision tree which is a schematic representation of the alternatives
available to a decision maker and their possible consequences and use it to analyze a problem.
Decision trees are particularly useful for analyzing situations that involve sequential how to compute
the expected value of perfect information and conduct sensitivity analysis on a simple decision
problem. Covered as well in this paper is the sensitivity analysis. Sensitivity analysis refers to
analysis that provides a range of probability over which the choice of alternatives would remain the
same. Unfortunately, it is impossible to consider all possible combinations of every variable in a
typical problem. Nevertheless, there are certain things a decision maker can do to judge the
sensitivity of probability estimates. Tables, examples and illustrations are presented in this paper to
further explain different subtopics of the decision theory.

Table of Contents
Decision Theory .....1
Decision Theory Elements.......1
Decision Theory Process .1
Causes of Poor Decision ..2
Decision Environments .3
Decision Making under Certainty 4
Decision Making under Uncertainty 4
Decisions Making under Risk ...7
Expected Monetary Value Criterion 8
Decision Trees ......8
Expected Value of Perfect Information ......9
Sensitivity Analysis ....11
Bibliography .....12