2a-Decision Theory - QMT437 Pn Paezah TOPIC 2 DECISION THEORY LEARNING OUTCOMES Students will be able to list the steps of decision-making process

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
QMT437 Pn. Paezah TOPIC 2: DECISION THEORY LEARNING OUTCOMES Students will be able to list the steps of decision-making process describe the decision-making environments apply various modeling techniques to analyze decisions under risk. Modeling Techniques Quantitative techniques used in decision analysis include: 1. Maximax, Maximin, Laplace, Criterion of Realism, Minimax Regret 2. Expected Monetary Value (EMV) 3. Expected Opportunity Loss (EOL) 4. Expected Value of Perfect Information (EVPI) 5. Decision Trees 6. Expected Value of Sample Information I. INTRODUCTION Decision theory is an analytic and systematic approach to the study of decision making. A good decision is based on logic, considers all available data and possible alternatives, and applies an appropriate quantitative technique. The 6 steps in decision making: 1. Clearly define the problem 2. List all possible decision alternatives/plans of actions . A decision alternative is a course of action or a strategy that may be chosen by a decision maker 3. Identify the possible states of nature (or outcomes) and, if available, their associated probabilities. A state of nature is an outcome or occurrence over which the decision maker has little or no control. 4. Determine the payoffs or returns accruing to each decision under each state of nature. 5. Select one decision model and evaluate each alternative using the model. 6. Make a decision, i.e. select the best alternative. The decision analysis can be summarized using a payoff table : Decision alternatives State of Nature S 1 S 2 ... S m d 1 r 11 r 12 ... r 1m d 2 r 21 r 21 ... r 21 ... ... ... ... ... d n r n1 r n1 ... r nm Probabilities P(S 1 ) P(S 2 ) ... P(S m ) r ij = the payoff if alternative d i is chosen and state of nature S j occurs 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Decision Making Environments There are three environments under which we make decisions. 1. Decision Making under Certainty In making decision under certainty, the decision maker knows with certainty all of the information in the decision problem, the consequence of every alternative or decision choice. 2. Decision Making under Uncertainty (without Probabilities) In decision making under uncertainty, there are several possible outcomes for each alternative and the decision maker has no basis to estimate the probability associated with the outcomes. 3. Decision Making under Risk Under this decision making environment, there are several possible outcomes for each alternative. Additionally, the decision maker is able to estimate a probability estimate for the occurrence of each of the possible states of nature that may occur. Under certainty environment all of the data in a decision problem are known with certainty and accurate. In most cases, we do not know what future yields or prices will be, what rates of returns we will receive from investments, or how consumers will react to a new food product. Since decision under certainty rarely occurs in real life, we will focus on decision making under
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/07/2012 for the course FSKM QMT437 taught by Professor Pn.wanfaezah during the Spring '12 term at Universiti Teknologi Mara.

Page1 / 8

2a-Decision Theory - QMT437 Pn Paezah TOPIC 2 DECISION THEORY LEARNING OUTCOMES Students will be able to list the steps of decision-making process

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online