Decision making under certainty & uncertainty

DECISION MAKING UNDER CERTAINTY AND UNCERTAINTY

Condition of Certainty.     Exhibit B-1 presents the case with the assumption that the anticipated new business will materialize. It therefore represents, in decision theory terminology, decision making under conditions of certainty. It is assumed the payoffs are certain to occur if the particular action is chosen and the probability of the additional business being second is 1.0. The decision to choose action A is obvious under these conditions with the given payoff data and decision rule.

Condition of Uncertainty. In a more realistic situation, the outcome is less than certain. The new business may not materialize. And then the department might be left with costly excess capacity the union may resist introduction of the new equipment because it replaces workers. The new equipment may not perform as anticipated. For these or other reasons, the decision maker may be uncertain about the consequences (for instance, that course A will result in a $20,000 contribution).  Suppose the manager considers these other possible outcomes and concludes the one serious uncertainty is that the new business may not be forthcoming. For purposes of simplicity, one of two conditions will exist in the future – either the new business will be secured as expected (O) or the new business will not materialize (O2). In the first case, the expected payoffs would be the same as in Exhibit B-1: but if the new business is not secure, then the addition of the new equipment would Decision Rule and Decision Variable.            When there are alternatives from which to choose, a rational way to approach the decision is to try to assess the outcomes of each action: then one can choose the outcome that best meets the criterion established for judging alternatives. This criterion is a combination of a decision rule and a decision variable. For example, the decision variable might be “direct dollar savings. “ contribution to overhead and profits, “time required for completion of the project,” and so forth .