Decision Theory
Decision Theory
McGraw-Hill/Irwin
Operations Management, Eighth Edition, by William J. Stevenson Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Decision Theory
Decision Theory
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Decision Theory
A set of possible future conditions exists that will have a bearing on the results of the decision
A list of alternatives for the manager to choose from A known payoff for each alternative under each possible future condition
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Decision Theory
Identify possible future conditions called states of nature Develop a list of possible alternatives, one of which may be to do nothing Determine the payoff associated with each alternative for every future condition
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Decision Theory
Evaluate alternatives according to some decision criterion and select the best alternative
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Decision Theory
Bounded Rationality The limitations on decision making caused by costs, human abilities, time, technology, and availability of information
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Decision Theory
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Decision Theory
Decision Environments
Certainty - Environment in which relevant parameters have known values Risk - Environment in which certain future events have probable outcomes Uncertainty - Environment in which it is impossible to assess the likelihood of various future events
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Decision Theory
Figure 5S.1
Decision Point Chance Event
Payoff 3
1
B
Payoff 4
2
Payoff 5 Payoff 6
Solved Problem 5