UNIT IV

Decision Analysis: Decision Making under

Certainty, Uncertainty, Risk, Revision of
probabilities, Expected value from Sample
Information.
 LIFE SKILLS – CORE SETS

THINKING EMOTION SOCIAL

• Creative • Coping with • Effective
• Critical emotions communication
• Problem solving • Empathy • Interpersonal
• Decision making • Coping with stress relationship
• Self awareness
 PROBLEM & DECISION
• What is Problem?
A situation , person or thing that needs attention and needs to be dealt with or solved.
• What is Problem solving?
It is the act of
Defining a problem;
Determining the cause of the problem;
Identifying, prioritizing and selecting alternatives for a solution and ;
Implementing a solution
• What is a decision?
A choice that you make about something after thinking about several possibilities
• What is decision making?
It involves the selection of a course of action from among two or more possible
alternatives in order to arrive at a solution for a given problem.
 PROBLEM & DECISION
• Breaks the homeostasis/ comfort zone/challenges you
• Worried about the outcome/consequences /dreadful
• What will people say? I will be blamed
• Feeling guilt ( sense responsibility)
PROBLEM SOLVING VS DECISION MAKING
• Problem solving is an analytical process used to identify the possible
solutions to the situation at hand.
• Decision making is a deliberate logical choice from the available
alternative solutions
• Problem solving is a process while decision is a choice.
• Both problem solving and decision making go hand in hand.
 INTRODUCTION TO DECISION
ANALYSIS
• The field of decision analysis provides a framework for making
important decisions
• Decision analysis allows us to select a decision from a set of possible
decision alternatives when uncertainties regarding the future exist.
• The goal is to optimize the resulting payoff in terms of a decision
criterion.
 DECISION MAKING
• A mental process ( cognitive process) resulting in the selection of an
alternative among several alternatives.
• Every decision making process produces a final choice.
UNCERTAININTY AND RISK IN DECISION MAKING
• A decision can be for short to intermediate as well as to long term. We
also know that decision are made for the future and future contain
uncertainty.
• Many decision tools have been develop to solve the problem of
uncertainty in decision.
• These tools form an important component of discipline called decision
analysis.
 DECISION MAKING
• Normally in decision we have two or more than two alternatives, from
which one needs to be chosen.
• The consequence of the alternative depends upon the outcomes of some
future random event (or states of nature)
• Outcomes of such decision are usually unexpected but possible to be
predicted, if a decision maker carries out information about an
alternative.
• The decisions can be:
Decision criteria for one time decision making involving uncertainty.
Decision tree to use for sequential decisions under uncertainty.
 DECISION MAKING UNDER
UNCERTAINTY
• The decision when are made in situation in which simply decision
maker knows what could occur but have no idea for the probability of
each outcome occurring.
• Decisions that are made under above described situation are is called “
Decision making under uncertainty”
• Criteria’s for decision under uncertainty:
A) Maximax (Optimistic):
Determine the best possible payoff for each alternative and then select
that one.
DECISION MAKING UNDER UNCERTAINTY
B) Maximin ( Conservative or Pessimistic):
Determine the worst possible payoff that can occur for alternative, then select them by looking to
the worst thing that can occur with each alternative and try to minimize the bad that can result.
C) Laplace ( Average):
Select the alternative that has the average payoff. This criteria treats all feature outcomes as
being equally likely.
D) Minimax Regret ( Minimum of all Maximum Regret):
Computed the regret for each payoff, which is the difference that payoff and the payoff that
would have occurred if we chose the best alternative. Then we need to select the alternative that
carry smallest regret value.
E) Hurwicz ( Realism)
It combines the optimism and pessimism using a selected ratio. It is also know as the criterion of
realism. Alpha is the coefficient of optimism, which is a decimal between 0 and 1. It measures
the degree of optimism of the decision. In short, Hurwicz is a compromise between Maximax
and Minimax criteria. It assumes that people tend to focus on extremes without guidance.
 PAYOFF TABLE

Alternatives Growing Stable Declining

Bonds 40 45 5
Stocks 70 30 -13
Mutual Funds 53 45 -5

• The decision alternatives in the table are :- Bonds , stocks and Mutual
funds
• The outcomes of states of nature are :- Growing, stable and declining
• The values in the table are called the payoffs. The payoffs can be
profits, cost, distance, time etc. In the above table it will be treated as
profits.
 DECISION MAKING WITH
PROBABILITIES (RISK)
• When the decision maker have the probability estimate for the future
occurrence of events, then decision under such situation are said as
decision making under risk.
• Decision making with probabilities will be known by:
a) Expected Value or Expected Monetary Value (EV or EMV)
A weighted average of the payoffs for a decision alternative.
b) Expected Value of Perfect Information (EVPI)
It is maximum payment for additional information about the decision
problem. That is, if we have the perfect information about the states of
nature before the decision is made how much is this information worth ?
 DECISION MAKING WITH
PROBABILITIES (RISK)
ALTERNATIVES S1 S2 S3
D1 12 9 13
D2 15 11 8
d3 5 18 10

• The payoff values in the table are the costs

• You are required to find the values of :
a) EMV
b) EVPI
SEQUENTIAL DECISION & DECISION TREE
• In some situations, decision maker doesn’t make a single decision at
one point of time but a series of decisions need to be made.
• A special tool for such situation used is Decision Tree.
• Decision tree is a decision support tool that uses a tree-like graph or
model of decisions and their possible consequences including chance
event outcomes, resource costs and utility.
• Decision trees are commonly used in operation research to help
identify a strategy most likely to reach a goal.
 ELEMENTS IN DECISION TREE
• A decision tree consists of 3 types of nodes (path):
1) Decision nodes – commonly represented by squares.
2) Chance nodes – represented by circles.
3) End nodes – represented by triangles
THANK YOU