People make several decisions every day which have an impact on their lives. Decisions such as which academic institution to choose for education, where to invest capital, which doctor to consult for treatment, whether to make or buy a product, whether to rent or use an owned resource and so on are some important decisions for which people would desire to make the correct choice. A decision, in general, may be defined as the selection by the decision maker of an act, considered to be the best according to some pre-designated standard, from among the several available options. Decision making is the process of making a choice for a particular action when several alternative actions are available in a given decision make environment. The purpose of decision making is to select the best alternative action, i.e., the one with the highest expected value.
TERMINOLOGIES USED IN DECISION MAKING
Course of action: The decision taken by the decision maker is called a course of action.
State of nature: Future events that are beyond the control of the decision maker are called state of nature.
Pay-off: A pay-off is an outcome, expressed in numerical values, that results from each possible combination of alternatives and states of nature.
STEPS IN DECISION MAKING
The following steps are involved in decision making:
Step 1 Determine the various alternative courses of action from which the best one is to be selected.
Step 2 Identify the possible outcomes, called the states of nature or events for the decision problem.
Step 3 Construct a pay-off table, i.e., a table representing profit, benefits and so on for each combination of alternative course of action and state of nature.
If there are m alternative courses of action A1, A2, …, Am and n states of nature S1, S2, …, Sn, then the pay-off matrix will be represented as presented in Table 16.1.
where xij is the pay-off resulting from the combination of ith state of nature or event and jth action.
Step 4 Choose the criterion which results in largest pay-off. The criterion may be economic, quantitative or qualitative (for example, market share, profit, taste of a food and so on.)