Donna L. Christian, Strayer University Winter Quarter (MAT 540) Instructor: Mune Lokesh March 11, 2012
Decision Analysis Page 2 of 4
In business today, many decision-making situations occur under conditions of uncertainty. The demand for a product can be one number this week and double that number next week or vice versa. There are several decision-making techniques to aid the decision maker in dealing with these types of uncertainties. There are two classes of decision situations, situations where probabilities can be assigned to future occurrences and probabilities that cannot be assigned. A decision-making situation includes several components, the decision itself and the actual events that can occur in the future, we refer to those as states of nature. The states of nature can be good and bad economic conditions, cold or warm weather, and an accident or no accident. The state of nature that does occur will determine the outcome of the decision, but the decision maker has no control over which state occurs. Payoff tables are organized so that the decision situations can be analyzed. Using a payoff table is a means of organizing a decision situation, including the payoffs from different decisions, given the various states of nature. Each decision will result in a specific outcome corresponding to the particular state of nature that occurs in the future. Payoffs are usually expressed as revenues or costs, but the can be expressed in a variety of values. Once a payoff table has been organized, there are several criteria available for making the actual decision. One of those is the maximax criterion. The maximax criterion results in the maximum of the maximum payoffs. The decision maker would be very optimistic. They would assume the most favorable state of nature would occur. When considering profit, the decision maker would pick the state of nature that gains the highest revenue. When considering...