Decision Making Under Uncertainty

Prachi Santosh Atre
Priyanka Gupta
Ayush Dixit
Introduction
Developed since the early 1950s Decision making areas a) Uncertainty
b) Certainty c) Risk
It is concerned with determining which decision, from a set of possible alternatives, is optimal for a particular set of conditions.
Example
Ford Motor Company must decide whether to purchase assembled door locks for the 2008 Ford F-150 Harley-Davidson truck or to manufacture and assemble the door locks at its plant. If sales of the F-150 truck continue to increase, it will be more profitable to manufacture and assemble the parts. If sales level off or decline, it will be more profitable to purchase the door locks assembled. Should it make or buy the door locks?
Elements of a Decision
1. Course of actions (Alternatives)
The alternatives, or acts, are the choices available to the decision maker. 2. Events or States of nature
The states of nature are the uncontrollable future events. The state of nature that actually happens is outside the control of the decision maker. 3. Payoff
A payoff is needed to compare each combination of decision alternative and state of nature.
Decision making under uncertainty

If the decision maker does not know with certainty which state of nature will occur, then he/she is said to be making decision under uncertainty.
The five commonly used criteria for decision making under uncertainty are: 1. The optimistic approach (Maximax) 2. The conservative approach (Maximin) 3. The minimax regret approach (Minimax regret)
4. Equally likely (Laplace criterion)

5. Criterion of realism with (Hurwicz criterion)
The optimistic approach (Maximax)

The optimistic approach would be used by an optimistic decision maker.
The decision with the largest possible payoff is chosen.
If the payoff table was in terms of costs, the decision with the lowest cost would be chosen.
Conservative Approach (Maximin)
The conservative approach (Maximin)
The conservative approach would be used by a conservative decision maker.

For each decision the minimum payoff is listed and then the decision corresponding to the maximum of these minimum payoffs is selected. (Hence, the minimum possible payoff is maximized.) If the payoff was in terms of costs, the maximum costs would be determined for each decision and then the decision corresponding to the minimum of these maximum costs is selected. (Hence, the maximum possible cost is minimized.)
Minimax Regret Approach (Minimax The minimax regret approach (Minimax Regret) regret)
The minimax regret approach requires the construction of a regret table or an opportunity loss table.
This is done by calculating for each state of nature the difference between each payoff and the largest payoff for that state of nature.
Then, using this regret table, the maximum regret for each possible decision is listed. The decision chosen is the one corresponding to the minimum of the maximum regrets.
The research department of HUL has recommended to the marketing department to launch a shampoo of three different types. The marketing manager has to deicide about the type of shampoo to be launched under the following estimated pay-offs for various levels of sales:
Types of shampoo
Estimated level of sales

15000 10000 5000
Egg shampoo Clinic shampoo
30 40 55
10 15 20
10 5 3
Delux shampoo
Maximax criterion
N1 N2 N3 maximum
S1
30 40 55
10 15 20
10 5 3
30 40 55
S2
S3
Maximax criterion 55 (S3) Deccision- Marketer should launch Delux shampoo
Maximin criterion
N1 N2 N3 minimum
S1
30 40 55
10 15 20
10 5 3
10 5 3
S2
S3
Maximin criterion 10 (S1) Deccision- Marketer should launch Egg shampoo
Regret Table
N1 N2 N3
S1
25 (55-30) 15 (55-40) 0 (55-55)
10 (20-10) 5 (20-15) 0 (20-20)
0 (10-10) 5 (10-5) 7 (10-3)
S2
S3
Opportunity loss matrix = highest payoff- each payoff
Regret Table/ Opportunity Loss Matrix

N1 N2 N3
maximum
25
S1
25
10
S2
15
15
S3
Minimax criterion= 7 (S3) Decision marketer should launch Deluxe shampoo
It is important to make decision .
FOR YOUR PRECIOUS TIME

Decision Making Under Uncertainty

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Prachi Santosh Atre

Decision making under uncertainty

4. Equally likely (Laplace criterion)

The optimistic approach (Maximax)

The decision with the largest possible payoff is chosen.

Conservative Approach (Maximin)

The conservative approach (Maximin)

The conservative approach would be used by a conservative decision maker.

Estimated level of sales

Egg shampoo Clinic shampoo

Maximax criterion 55 (S3) Deccision- Marketer should launch Delux shampoo

Maximin criterion 10 (S1) Deccision- Marketer should launch Egg shampoo

25 (55-30) 15 (55-40) 0 (55-55)

10 (20-10) 5 (20-15) 0 (20-20)

0 (10-10) 5 (10-5) 7 (10-3)

Opportunity loss matrix = highest payoff- each payoff

Regret Table/ Opportunity Loss Matrix

Minimax criterion= 7 (S3) Decision marketer should launch Deluxe shampoo

It is important to make decision .

FOR YOUR PRECIOUS TIME

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