Lesson 4 - Decision Theory Flashcards
(9 cards)
Decision Theory
Set of possible future conditions that will have a bearing on the result of the decision (states of nature), a list of alternatives a manager can choose from, with a known payoff for each alternative under each possible condition
Causes of poor decisions
Manager’s unwillingness to admit mistake, manager’s style Bounded rationality (limits to human ability, costs, time,..), sub optimization (decisions getting departmentalized, therefore being difficult to be optimal for whole organization)
Classification of certainty present
- Certainty: relevant parameters (cost, demand, capacity) have known values
- Risk: Means that certain parameters have probabilistic outcomes
- Uncertainty means that it’s impossible to assess likelihood of future events
Maximin
Determine worst possible payoff for each and take best “worst”
Maximax
Determine best possible payoff for each and take best “best”
Laplace
Determine Avg. payoff for each and take the best “average”
Minimax regret
Determine worst regret (best payoff-give payoff) and take best
“worst”
Decision Tree
chematic representation of alternatives available and their consequences,
particularly useful for sequential decisions