Decision-making under uncertainty

Question 1

What is uncertainty?

Answer 1

• An outcome of the decision that can not be forecasted with certainty.
  *It is unquantifiable.

Question 2

What techniques are used for uncertainty?

Answer 2

*Payoff tables without probabilities.
*Decision trees without probabilities
*Maximax, Maximin, Minimax Regret

Question 3

What is the Maximax rule?

Answer 3

An optimistic rule that choses the option with the ‘best of the best’ possible outcome. This managers likes to win and believes they can.

Question 4

What is the Maximin rule?

Answer 4

A pessimistic rule that looks at the alternatives, assumes the worst, and choses the one with the best bad outcome. i.e. the best of the worst. This manager hates to lose and so will seek to avoid it.

Question 5

What is the Minimax regret rule?

Answer 5

A rule for the person who will grieve over lost opportunity. The will choose the option that will minimize the regret they feel.

Question 6

Advantages of the Maximax, Maximin, Minimax Regret rule?

Answer 6

*Provides a decision rule for situation of uncertainty.
*If management knows their own mind it will help them relax after taking decisions.

Question 7

Disadvantages of the Maximax, Maximin, Minimax Regret rule?

Answer 7

• Doesn’t lead to the best outcome for the business or its owners (sub-optimal)

Question 8

Explain What-if analysis?

Answer 8

• Simulation technique that subjects a project to combination of changes to assumptions to see effect on profit/cost/success.
  *Function in Excel to conduct these simulations by changing the cells in a spreadsheet

Question 9

Advantages of What-if analysis?

Answer 9

*Helps managers understand the range of potential upside and downside outcomes from a decision.
*Can help decision making where the actual future values cannot be ascertained by research.

Question 10

Disadvantages of What-if analysis?

Answer 10

Does not lead to optimal decisions because there is no probability attached to the scenarios.