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Questions and Answers
The maximax decision rule is based on a pessimistic approach to decision-making.
False
The Laplace criterion selects the alternative with the lowest average value.
False
Decision-making under certainty assumes that the probability of occurrence of any outcome is unknown.
False
The Hurwicz criterion adopts a weighted average approach with a coefficient of realism (α) ranging from -1 to 1.
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The minimax rule prioritizes the action with the highest potential payoff.
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Decision theory is a tool used exclusively in operations management.
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The decision-making process in decision theory involves only four steps.
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Decision-making under uncertainty always involves using a mathematical model.
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The outcome of a decision made using decision theory is always certain.
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The feedback gathered after implementing a decision is not useful in future decisions.
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Study Notes
Decision Theory
- Decision Theory is a framework for making decisions when the outcome is uncertain, yet the potential choices have measurable outcomes.
- It is used in various fields such as economics, business, medicine, and political science.
- Decision Theory involves six steps:
- Identify the problem: Define the issue/situation that requires a decision.
- List the alternatives: Identify all possible options or courses of action.
- Identify the possible outcomes: For each alternative, list all possible results.
- List payoffs or conditional values: Identify the potential payoffs or costs for each possible outcome.
- Choose from among the alternatives using a mathematical model: Use a decision-making rule to select the best alternative.
- Implement the decision and gather feedback: Put the decision into action and observe the results.
Decision-Making Environments
- There are three types of decision environments:
- Decision-making under certainty: The outcomes of the decision are known with certainty.
- Decision-making under uncertainty: The probability of occurrence of any outcome is not available or is unknown to the decision-maker.
- Decision-making under risk: Not mentioned in the text.
Decision-Making Rules Under Uncertainty
- There are different decision rules that can be used in making decisions under uncertainty, including:
- Maximax: Prioritizes the action with the highest potential payoff, regardless of how likely that outcome might be.
- Maximin: Prioritizes the action that guarantees the best outcome in the worst-case scenario.
- Laplace criterion: Selects the alternative that has the highest average value.
- Hurwicz criterion: Adopts a weighted average approach, using a coefficient of realism (α) that ranges from 0 (pessimism) to 1 (optimism).
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Description
Learn about decision theory, a framework for making decisions under uncertainty, and its applications in various fields including economics, business, and medicine.
