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Decision Analysis

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Decision Analysis: Decision analysis is a set of quantitative decision making techniques for decision situations in which uncertainty exists.

Now, uncertainty can be classified into two ways/ types:

1. Subjective Probability: Subjective probability is the degree of belief to occurrence of the event.

2. Objective Probability: Objective probability is the probability which can be derived either based on historical occurrences or based on experimentation. Alternatively can be derived from statistical formula.

Consistency requirement: If the probability of an event A is 0.65, then the probability of event B must be 0.35.

i.e. P(A) + P(B) = 1

Mathematically, if A, B Є E Then A, B [pic] E A [pic]B = φ

P(A) + P(B) = 1, which is called Consistency requirements.

# Elements of Decision Problems:

A decision problem is usually viewed as having four common elements

1. The alternative course of action: The alternative course of action involves two or more options or alternative course of action. One and only one of these alternatives must be selected.

2. The states of nature: The state of nature are factors that affect the outcome of a decision but are beyond control of the decision maker, such as rain, inflation, political development etc.

3. Payoff table: A payoff table is the combination for each possible combination of alternative course of action and state of nature.

4. Uncertainty: The decision maker is uncertain about what state of nature will occur. However choose the criterion that results in the largest payoff.

#Types of Decision –Making Environment:

The types of decisions people make depend on how much knowledge or information they have about the situation. Three decision making environments are defined and explained as

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