MODELS OF DECISION MAKING

 All decisions can be categorized into the following

three basic models:

 The Rational/classical model

 The Administrative or bounded rationality model

 The Retrospective Decision making model.

1. The Rational/classical model
2. The Administrative or bounded
rationality model

 Developed by Herbert Simone.

 Assumes that the people while they make seek the
solution, normally will settle for much less.
 Because the decisions they confront demand greater
information, time , processing capabilities than they
possess.
 This model is based on sequential attention to
alternative solution, heuristic and satisficing.
3. The Retrospective Decision making
model.

 This decision making model focuses on how decision

makers attempt to rationalise their choices after
they have been made and try to justify their decisions.

 The individual becomes convinced that he or she is

acting rationally and taking a logical, reasoned
decision on an important topic.
Components of a decision
problem.
 Decision maker

 Acts (Course of action)

 Events (State of nature): occurrences which affect the

achievement of objectives.

 Outcomes
 Payoff: Based on cost or time.
 Opportunity cost(regret): Regret of an act is the difference
between the payoff of that act and the payoff for the best act that
could have been selected.
Payoff table and Regret table
 Payoff table/ Regret table is in matrix form.
 Calculates the payoff value/opportunity loss for each
act and event combination.
Calculation of regret table from
payoff table
 Steps to be followed:

1) Let every row of payoff table represent a

state of nature and every column represent
a course of action.
2) Then from each row select the highest
payoff and subtract all payoffs of that row
from it.
3) They are the opportunity losses.
Question:
Solution:
Question:
 Calculate the regret table from the following payoff
table?
Solution:
 Decision making
 Usually, there are three different conditions under
which decisions are made, which are explained below.

⮚ Conditions under certainty:

⮚ Conditions under risk: lacks perfect information

⮚ Conditions under uncertainty

Decision making under
uncertainty:
1. The maximax decision criteria
 Also known as “Criterion of optimism”.

⮚ Decision: Choose A1
2.The minimax decision criteria
 Calculated using the regret table.

 Maximum losses incurred by each act.

 Decision: Choose A3
3. The maximin decision criterion
4. Laplace criterion
 Each decision makers makes the assumption that probability of occurrence
of each event is equally likely.
5.Harwicz alpha criterion
 Combination of maximin criterion and maximin
criterion.
 The decision makers degree of optimism is represented
by α.
 The α lies between 0 and 1.
 When α=1, there is total optimism and α=0, there is
total pessimism.
 Calculate for each strategy
𝐷𝑖 = 𝛼𝑀𝑖 + 1 − 𝛼 𝑚𝑖
 where 𝑀𝑖 is the maximum payoff and 𝑚𝑖 is the
minimum payoff.