Decision Theory.

Decision making
Decision Process
Decisions under certainty, risk and
uncertainty.
 Decision Making.
Decisions are processes by which a manager
seeks to achieve some desired state. They are
means rather than ends. Making a decision
involves making a choice between the
alternatives. Decisions could be a) engineering
or scientific or b) management
Decision making is the sequential process of
thought and deliberation that results in a
decision.
The process of decision making is same in both
the types of decisions and involves a) defining
the problem b) gathering facts related to the
problem c) comparing these with right or wrong
criteria based on knowledge and experience
and then taking the best course of action
Management decisions are tough because
management problems are wider in scope and
they are related to human behavior which is
most unpredictable.
Management decisions could be either a)
programmed or b) Non programmed.
While Programmed decisions are repetitive and
routine in nature and provide solutions to
structured problems the Non programmed
decisions are of non routine or unique in
nature and attempt to provide solutions
Un Programmed to
decisions
complex and unstructured problems
Management

Top Broad, unstructured, infrequent, uncertainty

Middle Both structured and unstructured
Lower Frequent, structured, repetitive,
Level

routine, certainty

Programmed decisions
 The decision process
a

Identify & define Gather

The problem Information

Develop
alternatives

Evaluate
alternatives
Revise

Certainty Risk Uncertainty

Select
alternatives

Implement
decision

Evaluate
& control
The evaluation of alternatives is based on
alternative outcome relationship. The
three possible conditions are 1. Certainty
2. Risk and 3. Uncertainty
2. Certainty : The decision maker has a
complete knowledge of the outcome of
each alternative.
3. Risk : The decision maker has some
probabilistic estimate of the outcome of
each decision. Condition of risk occurs
when the decision maker has enough
information to allow the use of
probability in evaluating the alternatives.
Probability of occurrence of an is event is
the expectancy of event happening.
 Decisions with risk
Probability can be assigned based on
b. Logic or deduction: This is Objective
probability. This reflects the historical
evidence. Ex. Getting head/tail for a
tossed coin. Or getting a number on
rolling dice etc.
c. Past experience is with empirical
evidence.
d. Subjective estimate due to intelligence or
intuition.
When the decision maker has access to
probability information, the criterion for
decision making is to maximize s the
 Decisions under uncertainty
3. Uncertainty : The decision maker (dm)
has absolutely no knowledge of the
probability of outcome of each
alternative.
When no information exists the personality
characteristics of the decision maker
become more important for determining
which decision is made. The following
five characteristics describe what most of
the dm’s do.
c. Optimistic Decisions
d. Pessimistic Decisions
e. Realistic decisions.
 Criteria of Decision making
• Optimistic Decisions The DM think optimistically
about the event that influence decisions. They choose
the alternative that maximizes the outcome
• Pessimistic Decisions They believe that worst
possible outcome will occur no matter what they do.
They estimate the worst outcomes associated with
each alternative and select the best of these worst
outcomes.
• Realistic Decisions. They take the middle path
neither optimistic nor pessimistic.
• Regret minimizing Decisions. They want to
minimize the dissonance they experience after the
fact.
• Insufficient Reason Decisions. These are also
called eqi-probable decision maker. They assume
that all the possible outcomes have equal chance of
 Factors influencing decision
making
Individual differences influence the decision
making process. The four individual
differences which have a significant impact
of the decision making process are
• Values: Values are the guidelines that a person uses
when confronted with a situation in which a choice
has to be made. Values are acquired early in life and
are a basic part of individual’s thought. Value
judgment is involved at every stage in the process of
decision making. They are reflected in the decision
maker’s behavior before making the decision, in
making the decision and in putting the decision into
effect.

• Personality : Decision makers are influenced by

many psychological forces both conscious and
subconscious. These are strongly reflected in decision
making under uncertainty. Personality traits of the
• Propensity for risk : (Risk taking capacity ) This is
a specific aspect of personality which strongly
influences the process of making decision.
• Potential for dissonance : Traditionally
researchers have focused much of their attention on
the forces and influences on the decision maker
before a decision is made.
Utility of the alternatives is the criterion for decision
making. Value of the decision is dependent on the
utility.
Recently Behavioral scientists have focused their
attention on post decision anxiety or cognitive
dissonance experienced by the decision maker. Such
anxiety is related to lack of consistency or harmony
among individual’s various cognitions (attitudes,
beliefs and so on) Individuals are likely to use one or
more of the following to reduce their dissonance
a. Seek information that supports their decision.
b. selectively perceive information that supports the
decision
c. adopt a less favorable view of the foregone