Boston International College

MBA II Trimester
Emerging Concept of management
 Minimizing the time and cost of Organization’s
Operation

 Increasing the efficiency of organization

 Delegation will be easier and more effective

 Make Organization Success

 The Six Steps in Decision Theory

 Clearly define the problem at hand

 List the possible alternatives
 Identify the possible outcomes
 List the payoff or profit of each combination of
alternatives and outcomes
 Select one of the mathematical decision
theory models
 Apply the model and make your decision
• A state of nature is an actual event that may occur in the future.
• A payoff table is a means of organizing a decision situation,
presenting the payoffs from different decisions given the various
states of nature.

Payoff Table
 Types of Decision-Making Environments

• Type 1: Decision-making under certainty

– decision-maker knows with certainty the consequences of
every alternative or decision choice
• Decision-making under uncertainty (without probability)
– The decision-maker does not know the probabilities of the
various outcomes.
 Decision situation: An investor wants to decide which of the three property to buy.

Decision-Making Criteria:
Maximax, Maximin, Minimax, Minimax Regret
In the maximax criterion the decision maker selects the decision that
will result in the maximum of maximum payoffs; an optimistic
criterion.

Payoff Table Illustrating a Maximax Decision

In the maximin criterion the decision maker selects the decision that
will reflect the maximum of the minimum payoffs; a pessimistic
criterion.

Payoff Table Illustrating a Maximin Decision

Regret is the difference between the payoff from the best decision and all
other decision payoffs.
The decision maker attempts to avoid regret by selecting the decision
alternative that minimizes the maximum regret.

Regret Table Illustrating the Minimax Regret Decision

- The equal likelihood ( or Laplace) criterion multiplies the decision
payoff for each state of nature by an equal weight, thus assuming that
the states of nature are equally likely to occur.

Decision Values
Apartment building $50,000(.5) + 30,000(.5) = 40,000
Office building $100,000(.5) - 40,000(.5) = 30,000
Warehouse $30,000(.5) + 10,000(.5) = 20,000
- A dominant decision is one that has a better payoff than another
decision under each state of nature.
- The appropriate criterion is dependent on the “risk” personality and
philosophy of the decision maker.
Criterion Decision (Purchase)
Maximax Office building
Maximin Apartment building
Minimax regret Apartment building
Equal liklihood Apartment building
 Time –consuming Process

 Individual Domination

 Ambiguous Responsibility

 Not a perfect theory.