Page 298 - DCOM303_DMGT504_OPERATION_RESEARCH

Unit 14: Decision-making

Notes

Task Draw decision table for the following situation:

Rajesh needs to decide whether to sue his doctor not. If he does not, and he wins, he'll have
the satisfaction of seeing the malicious doctor suffer humiliation and might gain enough
money to pay the legal fees. If he looses, he will be bankrupted by the legal fees. But if he
doesn't sue, he'll always have to wonder whether he might have gained some satisfaction
by doing so.
14.4 Decision-making under Uncertainty

"Uncertainty" refers to situations when this randomness "cannot" be expressed in terms of specific
mathematical probabilities.
In decision-making under pure uncertainty, the decision maker has no knowledge regarding
the outcomes of any of the states of nature. In such situations, the decision-making depends
merely on the decision maker's personality type and the decision maker's behaviour is purely
based on his/her attitude toward the unknown. Some of these behaviours are optimistic,
pessimistic, and least regret, among others.
With no knowledge regarding the likelihood (probability) of any of the events occurring, the
decision maker must base his decision solely on the actual conditional payoff values, together
wit his attitude or anticipation toward earning those values. Four decision criteria reflecting
different attitudes will be discussed: the pessimistic, the optimistic, the equally likely, and the
Savage opportunity-loss decision criteria. These criteria may lead to different decisions for the
same problem; thus, it is important that the decision maker select his appropriate criterion at the
outset. We shall discuss each of the uncertainty decision criteria with respect to the apple peddler
problem.
14.4.1 Pessimistic Decision Criterion

The pessimistic decision criterion, or what is sometimes called the minimax or maximum
criterion, assures the decision maker that he will earn no less (or pay no more) than some
specified amount. It is a very conservative approach to decision-making, in that we anticipate
the worst possible outcome (minimum for profit and maximum for cost) for any strategy that
we might choose. The optimal strategy chosen is then the best (maximin or minimax) of the
anticipated outcomes.

Steps for Decision under Pessimistic Criteria

The formal procedure for finding the pessimistic decision is as follows:
1. For each possible strategy, identify the worst payoff value. This will be the row minimum
for a profit table and the row maximum for a cost table. Record this number in a new
column.
2. Select the strategy with the best anticipated payoff value (maximum for profit and minimum
for cost)
It should be pointed out that, this decision rule does not consider the utility values of the various
outcomes nor does it allow for the superimposing of the decision maker's subjective feelings
about the likelihood of the various events. Rather, this criterion is best suited for those situations,
where the probabilities are not easily evaluated and the decision maker is very conservative.
When dealing with the costs, the maximum cost associated with each alternative is considered
and the alternative that minimizes this maximum cost is chosen.

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