DECISION THEORY

Chapter 3
Decision under uncertainty

M. Naceur AZAIEZ

Tunis Business School

University of Tunis
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Types of decision-making attitudes under uncertainty

 Optimistic decision-maker

 Pessimistic decision-maker

 Moderately optimistic decision-maker (Hurwicz criterion)

 Savage criterion

 Rational decision-maker (Laplace criterion)

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Optimistic approach

 The DM assumes that each alternative will generate the

best possible result, then he chooses the one that gives
him the best result among the most favorable results.

 If the objective of the problem is a maximization, the DM

uses the Max-max criterion.

 If the objective is a minimization, the DM uses the

criterion Min-min.
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e1 e2 e3 e4 Max

a1 250 350 350 400 400

a2 225 300 380 420 420

a3 200 200 400 500 500 Max

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Conservative (Pessimistic) approach

 A DM assumes that each decision alternative generates the
worst payoff, then he chooses the action that gives him the
best result among the least favorable ones (Wald's criterion).

 If the objective of the problem is a maximization of the payoff,

the DM uses the criterion Max-min.

 If the goal is a minimization of the payoff, the DM uses the

Min-max criterion.
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e1 e2 e3 e4 Min

a1 250 350 350 400 250 Max

a2 225 300 380 420 225

a3 200 200 400 500 200

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Hurwicz criterion

 Most decision makers are not totally pessimistic or

optimistic.
 To measure the degree of optimism of such a DM, we
use a scale   [0,1], where
 0 indicates a totally pessimistic DM.
 1 indicates a totally optimistic DM.
 The approach uses a weighed sum of best payoff times 
with worst payoff times (1- ).
 Then, the highest weighed sum is selected.
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e1 e2 e3 e4 Max Min 0.4 Max+0.6 Min

* *
a1 250 350 350 400 400 250 310
a2 225 300 380 420 420 225 303
a3 200 200 400 500 500 200 320 Max
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Savage Min-max Regret

 This criterion is based on the regret that the DM can manifest

after choosing an alternative decision.
 It consists in comparing, a posteriori, the result obtained with
the best result that it was possible to obtain for the same state
of nature.
 We first compute a regret table by calculating the difference
between each payoff in a column and the best payoff in that
column.
 For each decision, list the maximum regret.
 Choose the decision with the minimum of these values.
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e1 e2 e3 e4
a1 250 350 350 400
a2 225 300 380 420
a3 200 200 400 500

Regret table
e1 e2 e3 e4 Max

a1 0 0 50 100 100

a2 25 50 20 80 80 Min

a3 50 150 0 0 150
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Criticism

 In all the above criteria the maximum and/or the

minimum payoff is used as a basis for decision

 Except for the regret criterion, all other entries are

ignored in choosing the “best” alternative

 The extreme payoffs that were used for decision might

be extremely unlikely
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Laplace criterion

 A rational DM tries to incorporate all the information into

the evaluation process. He uses the average payoff over
all entries.

 Because no probabilities are identified, all payoffs are

considered as equally likely

 The criterion selects the best average (largest when

maximizing a payoff and the smallest when minimizing it)
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e1 e2 e3 e4 Mean

a1 250 350 350 400 337.5

Max
a2 225 300 380 420 331.25

a3 200 200 400 500 325