Decision Criteria Under Uncertainty
When making decisions where the probabilities of different outcomes (states of nature) are unknown, we rely on criteria specific to decision-making under uncertainty. These criteria help choose the best option based on the possible payoffs or losses.
Common Uncertainty Decision Criteria
The primary criteria used under conditions of uncertainty are:
- Maximin criterion: This is a pessimistic approach. For each alternative, find the minimum possible payoff. Then, choose the alternative that has the largest (maximum) of these minimum payoffs.
- Maximax criterion: This is an optimistic approach. For each alternative, find the maximum possible payoff. Then, choose the alternative that has the largest (maximum) of these maximum payoffs.
- Minimax (Regret) criterion: This criterion focuses on minimizing potential regret (or opportunity loss). First, calculate the regret (opportunity loss) for each outcome. Regret is the difference between the best possible payoff for a state of nature and the payoff actually received. Then, for each alternative, find the maximum regret. Finally, choose the alternative with the minimum (min) of these maximum regrets.
Why Minimize Expected Loss Isn't Used Under Uncertainty
The criterion 'Minimize expected loss' refers to minimizing the Expected Opportunity Loss (EOL). This method involves calculating the expected value of the opportunity loss for each alternative.
Crucially, calculating EOL requires knowing the probabilities of each state of nature. Decision-making under uncertainty is defined by the *lack* of known probabilities. Therefore, criteria that depend on probabilities, like minimizing expected loss, are not applicable under uncertainty. They are used instead for decision-making under risk (where probabilities are known).
Since Maximin, Maximax, and Minimax (Regret) do not require probability information, they are valid criteria for decision-making under uncertainty. Minimizing expected loss requires probabilities and is thus used under risk, not uncertainty.
Conclusion
Based on the definitions, the criterion not used for decision-making under uncertainty is minimizing expected loss, as it requires known probabilities.
Important Questions from Decision Making
Which of the following are necessary conditions for applying Simeon Denis Poisson distribution in the field of managerial decision making?
A. Each occurrence of an event is independent of the occurrence of the other event
B. The probability of an occurrence is the same for any two intervals of equal length
C. Poisson distribution describes continuous occurrences over a specific time interval
D. In each interval, occurrences can range from zero to infinity
Choose the correct answer from the options given below:
Which of the following common difficulties are faced in making decisions and implementing?
(A) Non-actionable information
(B) Unsupporting environment
(C) Easy acceptance by subordinates
(D) Ineffective communication
(E) Incorrect timing
Choose the correct answer from the options given below
The major components of Nicosia Model of consumer decision-making are:
A. The consumer's attitude based on firm's message exposure
B. Perceptual and learning constructs
C. Feedback in the form of purchase experience
D. Extensive problem solving by consumer
E. Consumer's product search and evaluation
Choose the correct answer from the options given below:
Match List - I with List - II.
List - I
Decision Rule
List - II
Rationale for applying the decision Rule to Down App.
(A)
Conjunctive
I)
"I bought the Smartphone App with the highest over all railing".
(B)
Disjunctive
(II)
"I down loaded the Smartphone App that had the most downloads".
(C)
Affect Referred
(III)
"I selected the Smart Phone App that had no bad features".
(D)
Majority vote
(IV)
"I picked the Smart Phone App that excelled in at least one attribute ".
Choose the correct answer from the options given below:
- What are the characteristics of programmed decisions ?
A. Problems are unique and novel
B. Solutions are based on rules and established procedures
C. Made by top management only
D. Problems are routine and repetitive
E. Conditions in which they occur are highly certain
Choose the most appropriate answer from the options given below :
