As discussed in the previous reflection there

are 3 different decision environments:

Decision Environment 2: Under uncertainty

When a manager lacks confidence in assessing the possibilities of various events or when there is
essentially no probability data available, an atmosphere of uncertain decision-making exists are at your
service. These five different decision-making criteria are used for dealing with specific situations:

 Maximax
 Maximin
 Criterion of realism
 Equally likely
 Minimax regret

Maximax

Maximax is the criterion used by a decision maker who chooses the act which makes possible the
maximum payoff. If the payoff table contains losses rather than profits, the Maximax decision maker
would choose the act which would make possible the minimum loss.

This criterion is also known as criteria of optimism because it reflects optimistic attitude of the decision
maker.

As a decision rule, the Maximax criterion has many advantages. It is straightforward and simple to use
because it just needs to compare each alternative's greatest payout. Because it eliminates the worst case
scenario and concentrates on the best, it also conveys a positive and optimistic attitude. It encourages
innovation and taking risks by giving preference to options with larger potential rewards.

As a decision rule, the maximax criterion has certain drawbacks. For example, it ignores the
probabilities and values of the other options, which makes it unrealistic and naive. By disregarding the
expenses and hazards associated with the alternatives, it can also result in poor decisions and losses. It
can also be illogical and inconsistent since, depending on how the payoffs are framed or presented, it
may change the order in which the options are preferred.

Maximin

Maximin" means "Maximize the Minimum Payoff". This criterion is appropriate for Pessimist persons.
Using this criterion, the decision-maker looks at the worst that can happen under each action and then
choose the action that has the largest payoff for the worst-case scenario. The maximin rule
involves selecting the alternative that maximises the minimum pay-off achievable.

The primary advantage of the mini-max regret decision criterion is its relative simplicity. This criterion's
disadvantages include its emphasis on the worst possible outcome, and it ignores risk as represented by
an outcome's probability of occurring.

Criterion of realism-Hurwicz Criterion:

If the decision maker is neither optimistic nor pessimistic, and he decides to choose between these
extremes by giving them weights. The weights which gives maximum of the weighted profits is the
decision chosen by the decision maker. This approach is known as Hurwicz criterion.

Hurwicz criteria were used to find the weighted outcome:

Weighted outcome = α (maximum payoff) + (1- α) (minimum payoff).

The Hurwicz criterion is arguably one of the most widely used rules in decision-making under
uncertainty. It allows the decision maker to simultaneously consider the best and the worst possible
outcomes, by articulating a "coefficient of optimism" that determines the emphasis on the best end.

Equally likely

this is also called LaPlace, decision criterion. This criterion finds the average payoff for each alternative
and select the alternative with highest average. This criterion assumes that all probability of occurrence
for the state of natures are equal, and thus each state of nature is equally likely.

if there are no data available on the probabilities of the various outcomes; appear reasonable to
suppose that these are equal. Hence, if there are n results the probabilities of everyone is 1/n.

Minimax regret

The Minimax Regret Criterion is a decision-making strategy aiming to minimize the potential for regret
by selecting the alternative with the smallest maximum regret across all possible scenarios. It prioritizes
the mitigation of worst-case scenarios.

 The Minimax Regret Criterion is easy for decision-makers to use - simply calculate 'regret' for
each alternative and choose the option with lowest maximum regret

 Decision-makers that are risk-neutral find it useful - simply looking not to make a bad decision.

 Regret is calculated as the difference between the payoff of the best decision in a given state of
the world and the payoff of the decision actually made in that state.

Decision Environment 3:Under Risk

It is typical for the decision-maker in real-world scenarios to be somewhat aware of the likelihood of the
various outcomes. These odds could be derived from market research, professional judgments, the
decision maker's own assessments of what will happen in the future, and more. Decision making under
risk is the term used to describe the issue setting where each outcome's probability of occurring can be
evaluated.

Methods of making decisions under risk:

 expected monetary value :The expected monetary value of a decision alternative is the sum of all
possible payoffs from the alternative, each weighted by the probability of that payoff occurring.

EMV = Probability x Impact.

 expected opportunity loss :

Expected opportunity loss (EOL) is a statistical calculation used primarily in the business field
to help determine optimal courses of action.[1] Doing business is full of decision making. Any
decision consists of a choice between two or more events. For each event, there are two or more
possible courses of action that you might take. Calculating the EOL is an organized way of using
a mathematical model to compare these choices and outcomes, to make the most profitable
decision.

To calculate the expected opportunity loss, simply subtract the actual payoff amount from the
optimal payoff amount.

 expected value of perfect information

The expected value of perfect information analysis tries to measure the expected cost of that
uncertainty, which “can be interpreted as the expected value of perfect information (EVPI),
since perfect information can eliminate the possibility of making the wrong decision” at least
from a theoretical perspective..

EVPI = EMV(Info) - EMV(A).

The expected value of perfect information, or EVPI, is a theoretical number that says how much
a business should pay to know with certainty the outcome of a decision. On the other hand, the
expected value of sample information, or EVSI, is a real number that says how much actual
information is worth.

Problem 1: solution:

Let us use a decision table to answer the above question

Favorabl
Unfavorable
Strategies e Market
market ($)
($)
1 10000 -8000
2 8000 -4000
3 0 0
The problem is based on one of the decisions making under uncertainty.

a) We know, Cal is a risk taker, and he should use the Maximax decision criteria. In this
approach, he selects the row that has maximum value. $10,000 is the maximum value from the
above table.
Therefore, he selects strategy 1, which is the optimistic decision approach.

b) Becky should use maximin decision criteria because he tries to avoid risk. The minimum
outcome from the above table is −$8,000 for strategy 1, −$4,000 for strategy 2 and $0 for strategy
3. The maximum of these values is selected.
 Thus, Becky selects strategy 3 which is pessimistic decision approach

c)If both had same risk taking approach, then they would use equally likely approach. This
approach selects the alternative that maximizes the row averages.
Let us calculate the row average.

Strategy 1:

10,000-8000/2=$1000

Strategy 2:

8000-4000/2=$2000

 by using the equally likely approach, strategy 2 is the best decision which maximizes the row
average.

Problem :2

Calculate the expected values for the small shop, medium-sized shop, and no shop options:

Small Shop:

EV=(0.2X$75,000)+(0.5X$35000)+(0.3X(-60000))=15500

Medium shop:
EV=(10,000X0.2)+35000X0.5+-60000X0.3=19500

No shop
EV=0

PROBLEM :3

As can be seen, the best decision is to build the medium-sized shop.

The EMV for this alternative is $19,500.

The decision tree for Monica’s problem is given in the next slide. The
tree shows all alternatives, outcomes, probability values, payoffs, and
EMVs. The expected value computations at the various nodes are as
follows:

• EMV-Node 1= +60,000 * 0.6 + -20,0002 * 0.4 = +28,000

• EMV-Node 2= +90,000 * 0.6 + -30,0002 * 0.3 = +42,000
• EMV-Node 3 = +0
• EMV-Node 4 = +50,000 * 0.8 + -30,0002 * 0.2 = +34,000
• EMV-Node 5 = +80,000 * 0.8 + -40,0002 * 0.2 = +56,000
• EMV-Node 6 = - +10,000
• EMV-Node 7 = +50,000 * 0.1 + -30,0002 * 0.9 = -+22,000
• EMV-Node 8 = +80,000 * 0.1 + -40,0002 * 0.9 = -+28,000
• EMV-Node 9 = - +10,000
• EMV-Node 10 = +56,000 * 0.5 + -10,0002 * 0.5 = +23,000
Monica’s optimal solution is to not conduct the pilot study and
construct the large plant directly. The EMV of this decision is $42,000.

Decision Tree for Monica’s Problem

1. Build Medium-Sized Shop

- EMV = $19,500

2. Conduct Pilot Study

├── Outcome A: Success (60% Probability)
│ ├── Build Large Plant
│ │ ├── EMV = +$60,000 * 0.6 = +$36,000
│ │ ├── Build Small Plant
│ │ │ └── EMV = +$90,000 * 0.6 = +$54,000
│ └── EMV-Node 1 = +$28,000
│
── Outcome B: Failure (40% Probability)
├── Build Large Plant
│ ├── EMV = -$20,000 * 0.4 = -$8,000
│ └── EMV-Node 2 = +$42,000
│
├── Build Medium Plant
│ ├── EMV = +$50,000 * 0.8 + -$30,000 * 0.2 = +$34,000
│ └── EMV-Node 4
│
├── Build Small Plant
│ ├── EMV = +$80,000 * 0.8 + -$40,000 * 0.2 = +$56,000
│ └── EMV-Node 5
│
├── No Build
│ └── EMV = +$0
│
3. No Pilot Study
├── Directly Build Large Plant
│ └── EMV = +$42,000
└── Other Decisions
├── EMV-Node 3 = +$0
├── EMV-Node 6 = -$10,000
├── EMV-Node 7 = -$22,000
├── EMV-Node 8 = -$28,000
├── EMV-Node 9 = +$10,000
 └── EMV-Node 10 = +$23,000

Problem:4

a. An optimistic will consider the favourable conditions and select the best out of it. So, the best
in unfavourable column is 400,000 i.e. ACME EQUIPMENT.

b. A pessimistic will consider the unfavourable conditions and select the best out of it. So, the
best in unfavourable column is -15000, i.e. HIGH PRO EQUIPMENT

c. Returns for each type of equipment considering probability of favourable market = 0.76 and
for unfavourable market = 0.24

ACME = 0.76 * 400000 - 0.24* 175000 = 262000

STANDARD = 0.76 * 280000 - 0.24 * 90000 = 191200

HIGH PRO = 0.76* 95000 - 0.24 * 15000 = 68600

As the expected return is maximum in ACME, the person should buy ACME equipment.

Problem:5

To determine the best decision for Shaq Bryant in ordering newspapers, let's analyze each criterion:

(a) Maximax Criterion

 This criterion chooses the decision that has the maximum possible payoff.
 Shaq's maximum profit comes when demand is highest (500 newspapers). He makes $1.25
profit per newspaper ($2.50 selling price - $1.25 cost).
 Therefore, under the maximax criterion, Shaq should order 500 newspapers.
)Equally Likely Criterion
 Assumes that all states of nature are equally likely.
 Expected profit for ordering 100 newspapers: $13×125+13×125+13×125=$125$.
 Expected profit for ordering 300 newspapers: $13×125+13×375+13×375=$291.67$.
 Expected profit for ordering 500 newspapers: $13×125+13×375+13×625=$375$.
 Under the equally likely criterion, Shaq should order 500 newspapers.

d) Criterion of Realism with α = 0.45

 This is a weighted average of the maximin and maximax criteria.
 For 100 newspapers: Maximin = $125, Maximax = $125.
 For 300 newspapers: Maximin = $125, Maximax = $375.
 For 500 newspapers: Maximin = $125, Maximax = $625.
 Weighted profit for each option = α × Maximin + (1 - α) × Maximax.
 Calculating these for each option
e) Minimax Regret Criterion
 The regret is the difference between the profit of the chosen decision and the profit of the best
decision in each state of nature.
 Regret for 100 newspapers if demand is 300 or 500 is $250 and $500 respectively.
 Regret for 300 newspapers if demand is 100 or 500 is $0 and $250 respectively.
 Regret for 500 newspapers if demand is 100 or 300 is $0 and $0 respectively.
 The maximum regret for each decision: 100 newspapers = $500, 300 newspapers = $250, 500
newspapers = $0.
 Under minimax regret, Shaq should order 500 newspapers.

Now let's calculate the Criterion of Realism (part d).

Based on the Criterion of Realism with α = 0.45:

 The weighted profit for ordering 100 newspapers is \$125.00.

 The weighted profit for ordering 300 newspapers is \$262.50.
 The weighted profit for ordering 500 newspapers is \$400.00.

Therefore, under the criterion of realism with α = 0.45, Shaq should order 500 newspapers for the
maximum weighted profit.

(a) Under the Maximax criterion: 500 newspapers.

(b) Under the maximin criterion: 100, 300, or 500 newspapers (all have the same worst outcome).

(c) Under the equally likely criterion: 500 newspapers.

(d) Under the criterion of realism with α = 0.45: 500 newspapers.