CERTAINITY

,UNCERTAINITY AND RISK

OF DECISION MAKING.

CERTAINITY

By conditions of certainity ,we mean that the decision maker can specify

the consequences of a particular decision ,or act . Of course , certainity about

future events is difficult and managerial decisions must be made in awareness

that future conditions may vary widely from those contemplated when the

decision is being made . Nevertheless , many managerial decisions may be

made in conditions approaching cetainity.

Decision –making under certainity may seem trival ,but as the number of

possible alternatives increases ,finding the one with the highest pay –off

becomes more and more difficult .

RISK

In decision –making under conditions of risk , the consequences of a particular

decision cannot be specified with known probability values . The value of the

probability associated with the event is a measure of the likelihood of the

occurrence of that event .

Evaluation of alternatives is done by calculating the expected pay off associated

with each alternative. The expected pay off associated with each alternative is the

sum of the value of each possible outcome times its associated probability . As a

decision- making ,the use of this approach maximises the expected pay off.

UNCERTAINITY

More prevalent than either conditions of certainity or risk are conditions of uncertainity .

Uncertainity exists when the decision-maker does not know the probabilities associated with the

possible outcomes , through he has been able to identify the possible outcomes and their related

pay offs . This is not the same as decision-making under conditions of complete ignorance , in

which even the possible outcomes and their pay-off cannot be identified . Since pay offs are

identified but probabilities are unknown under conditions of uncertainity , the criterion of

maximising the expected pay off cannot be used in evaluating the decision alternatives , or acts

.Three other bases that can be used , however are the maximin , maximax and minimax regret

citeria .

MAXIMIN

If the manufacturer is pessimistic or cautious in

his approach , he can choose that decision act which

maximises the minimum pay off . This is called the

maximin criterion .

MAXIMAX

If the manufacturer is optimistic , he may choose

that decision act which maximises the maximum pay

off . This is called maximax.

MINIMAX REGRET

The third possible criterion , called minimax regret , looks

at the decision problem from the point of view that is niether

pessimistic nor as optimistic as the maximin and maximax

criteria , respectively. As the name implies the minimax –regret

criterion is the one by which the decision maker minimises the

maximum regret that can occur , no matter what the outcome .

THANK YOU

By Deanne

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