19-04-2014, 04:32 PM
DECISION MAKING
WHAT IS DECISION MAKING ?
Decision making can be defined as the mental processes resulting in the selection of a course of action among several alternative scenarios.
TYPES OF DECISION MAKING ENVIRONMENT
Under conditions of certainty-It is the situation where only one state of nature exist . There is complete certainty about the future. it is easy to analyze the situation and make decision
Under conditions of uncertainty-It is the situation where more than one state of nature exist and decision maker lacks sufficient knowledge to assign probabilities to the various states of nature.
Under conditions of risk - It is the situation where more than one state of nature exist and the decision maker has sufficient knowledge to assign probabilities to various states of nature
Note-Decision making under certainty is of little interest because business environment is dynamic
DECISION MAKING UNDER UNCERTAINITY
LAPLACE-According to this criteria if there are n states of nature the probability of occurrence of each state of nature would be (1/n). Using this probability expected payoffs is calculated for each alternative and alternative with maximum gain is selected.
Hurwicz-This is the more realistic approach that takes into account both optimism and pessimism and assign them weights according to degree of optimism or pessimism. The alter native which maximizes the sum of these weighted payoffs is then selected. α and (1-α) is the degree of optimism and pessimism respectively where α lies b/w 0 and 1.