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Unformatted text preview: Chapter 3 Decision Theory S. Neuburger Decision Theory We make decisions all the time. What makes a good decision? One that is based on logic, considers all available data and possible alternatives, and applies the quantitative approach. A good decision can result in a bad outcome. When we make decisions, we try to obtain as good an outcome as possible, according to some standard of what is good or bad. In business, this standard is monetary gain or loss. In a decision we choose between different alternatives. The effect of a decision depends on the course of action as well as uncontrollable factors, which we will call states of nature. States of nature must be mutually exclusive and collectively exhaustive. Steps in Decision Making 1. Define problem 2. List alternatives 3. Identify possible outcomes / states 4. List profit of outcomes (utility table) 5. Select mathematical decision theory model 6. Apply model; make decision Decision Making Under Certainty each action is known to lead invariably to a specific consequence; simply...
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- Spring '10