No such thing

Statistician George Chacko (1991) defines

decision-making as “the commitment of
resources today for results tomorrow.”
Because decisions involve
expectations about the future,
they always involve uncertainty
If people talk about “certainty” they
can only be referring to certainty
about what they want the outcome
to be (desires)
Solution to any decision problem consists of these steps:
1. Identify the problem
2. Specify objectives and the decision criteria for choosing a solution
3. Develop alternatives
4. Analyze and compare alternatives
5. Select the best alternative
6. Implement the chosen alternative
7. Verify that desired results are achieved

Decisions problems that involve a single decision are usually best

handled through payoff table, whereas problems that involve a
sequence of decisions, are usually best handled using decision
trees
Rows of a payoff table (called also decision matrix) relate to the
alternatives, columns relate to the states of nature.

Elements of a decision matrix represent the payoffs for each alternative

under each possible event.

A grocer solves a problem of how much pastry to order every day. His
profit depends on a demand that can be low, moderate, or high.

Values of the profit per day (in $) for these situations and for small, medium
or large order are shown in Table. The body of this table represents a
decision matrix.
Demand Low Moderate High
Order

Small 50 50 50

Medium 42 52 52

Large 34 44 54
OUTLINE

Pengertian dan
Elemen-Elemen Keputusan

Pengambilan Keputusan dalam

Kondisi Risiko (Risk)
Teori Keputusan
Pengambilan Keputusan
dalam Kondisi Ketidakpastian
(Uncertainty)

Analisis Pohon Keputusan

Under complete uncertainty, either no estimates of the probabilities for
the occurrence of the different states of nature are available, or the
decision maker lacks confidence in them.

For that reason, probabilities are not used at the choice of the best
alternative.

Most of the rules for decision making under uncertainty express a

different degree of decision maker´s optimism
Kriteria Maximax

Demand Low Moderat High Row

Order e Maximum

Small 50 50 50 50

Medium 42 52 52 52

Large 34 44 54 54 Maximum

The best overall profit is $54 in the third row.

Hence, the maximax rule leads to the large order (the grocer hopes
that the demand will be high).
 Maximin rule: wald criterion
The maximin rule (Wald criterion) represents a pessimistic
approach when the worst decision results are expected.

The decision maker determines the smallest payoff for each

alternative and then chooses the alternative that has the best
(maximum) of the worst (minimum) payoffs (therefore “maximin”).

In Table, the smallest numbers in the rows are 50, 42, 34. Since
50 is the largest, the low order should be chosen (if order is low,
the $50 grocer‘s profit is guaranteed).
 Hurwicz

The Hurwicz -criterion represents a compromise between the optimistic

and the pessimistic approach to decision making under uncertainty. The
measure of optimism and pessimism is expressed by an optimism -
pessimism index.

The more this index is near to 1, the more the decision maker is optimist. a
weighted average of the best payoff and the worst payoff is computed for
each alternative and the alternative with the largest weighted average
should be chosen
If we choose = 0.7 at determining the best size of the order in

Table, the weighted average (WA) of the largest and the smallest profit
for each size of the order has the following values:

WA (small) = 0.7* 50 + 0.3 * 50 = 50

WA (medium) = 0.7* 52 + 0.3 * 42 = 49
WA (large) = 0.7* 54 + 0.3 *34 = 48

Maximizing the weighted average of the largest and the smallest profit,
the small order should be selected
Minimax regret/savage criterion
Previous criterion can be criticized because they focus only on extreme
payoffs and exclude the other payoffs. An approach that does take all
payoffs into account is the minimax regret rule. This rule represents a
pessimistic approach used for an opportunity loss table.

The opportunity loss reflects the difference between each payoff and the
best possible payoff in a column. Hence, opportunity loss amounts are found
by identifying the greatest payoff in a column and, then, subtracting each of
the other values in the column from that payoff.
The values in an opportunity loss table can be viewed as potential ”regrets”
that might be suffered as the result of choosing various alternatives. Tthis
alternative has the “best worst”).
 Demand Low Moderat High Row
Order e Maximum

Small 50 50 50 50

Medium 42 52 52 52

Large 34 44 54 54

Demand Low Moderate High Maximu

Order m Loss
Small 0 2 4 4 ¬ Mini
mum
Medium 8 0 2 8
Large 16 8 0 16

The minimax regret criterion disadvantage is the inability to factor

row differences.
The principle of insufficient reason (Laplace criterion)
assumes that all states of nature are equally likely. Under this
assumption, the decision maker can compute the average payoff
for each row (the sum of the possible consequences of each
alternative is divided by the number of states of nature) and, then,
select the alternative that has the highest row average.

This procedure is illustrated by the following calculations with the

data in Table
EMV (small) = (50 + 50 + 50)/3 = 50
EMV (medium) = (42 + 52 + 52)/3 = 48 2/3
EMV (large) = (34 + 44 + 54)/3 = 44
Since the profits at the small order have the highest average, that
order should be realized.
Demand Low Moderat High
Order e

Small 50 50 50

Medium 42 52 52

Large 34 44 54
Decision Making with Probabilities
Expected Value Approach
●

●If probabilistic information regarding the states

of nature is available, one may use the
expected Monetary value (EMV) approach (also
known as Expected Value or EV).
●Here the expected return for each decision is
calculated by summing the products of the
payoff under each state of nature and the
probability of the respective state of nature
occurring.
●The decision yielding the best expected return
is chosen.
Expected Value of a Decision
Alternative
●The expected value of a decision alternative is the
sum of weighted payoffs for the decision alternative.
●The expected value (EV) of decision alternative d is
i
defined as:

where: N = the number of states of nature

P(sj) = the probability of state of nature sj
Vij = the payoff corresponding to decision
alternative di and state of nature sj
 Demand Low Moderat High
Order e

Small 50 50 50
RISK DECISION
Medium 42 52 52

Large 34 44 54

In this case, the decision maker doesn´t know which state of nature will occur
but can estimate the probability of occurrence for each state.

These probabilities may be subjective (they usually represent estimates from

experts in a particular field), or they may reflect historical frequencies.

A widely used approach to decision making under risk is expected monetary

value criterion. The EMV of an alternative is calculated by multiplying each
payoff by the probability for the relevant state of nature and summing the
products.

This value is computed for each alternative, and the one with the highest EMV is
selected.
 The EMV for various sizes of the order are as follows.

EMV (small) = 0.3*50 + 0.5*50 + 0.2*50 = 50

EMV (medium) = 0.3*42 + 0.5*52 + 0.2*52 = 49
EMV (large) = 0.3*34 + 0.5*44 + 0.2*54 = 43

Therefore, in accordance with the EMV criterion, the small order

should be chosen

Note that the EMV of $50 will not be the profit on any one day. It
represents an expected or average profit. If the decision were
repeated for many days (with the same probabilities), the grocer
would make an average of $50 per day by ordering the small
amount of pastry.

The EMV criterion remains as the most useful of all the decision
criteria for decision making under risk. For risky decisions, a
sensible approach is first to calculate the EMV, and then to make
a subjective adjustment for the risk in making the choice.
Another method for incorporating probabilities into the decision
making process is to use expected opportunity loss (EOL).

The approach is nearly identical to the EMV approach, except

that a table (or matrix) of opportunity losses (or regrets) is
used. The opportunity losses for each alternative are weighted
by the probabilities of their respective states of nature and
these products are summed.

The alternative with the smallest expected loss is selected as

the best choice
 Demand Low Moderate High Maximu
Order m Loss
Small 0 2 4 4
Medium 8 0 2 8
Large 16 8 0 16

Supposing that the probabilities of various sizes of the demand are

0.3, 0.5, 0.2, we can determine the EOL for each size of the order.

EOL (small) = 0.3*0 + 0.5*2 + 0.2*4 = 1.8

EOL (medium) = 0.3*8 + 0.5*0 + 0.2*2 = 2.8
EOL (large) = 0.3*16 + 0.5*8 + 0.2*0 = 8.8
Since the small order is connected with the smallest EOL, it is the
best alternative.

The EOL approach resulted in the same alternative as the EMV

approach. The two methods always result in the same choice,
because maximizing the payoffs is equivalent to minimizing the
opportunity losses
Another possibility for decision making under risk is using
the maximum - likelihood decision criterion. According to
this criterion, we consider only the state of nature with the
highest probability and choose the best alternative for that state
of nature.

If we suppose in the decision problem given in Table that the

probabilities of various sizes of the demand are 0.3, 0.5, 0.2,
the moderate demand is most likely. Under this situation, the
medium order is the best.

Demand Low Moderate High

Order

Small 50 50 50

Medium 42 52 52

Large 34 44 54

Since the maximum-likelihood criterion takes only one uncertain

state of nature into account it may lead to bad decisions.
Decision Making Under Risk: Fact or Fiction

First, a good risky decision does not guarantee a good outcome;

rather, it is one consistent with the decision makers beliefs about
possible outcomes. A good decision is a considered choice based
on a rational interpretation of the available information. Whether
such a decision turns out right or wrong is partly a matter of luck
and in any case can never be determined until after the event, and
often not even then.

Second,
the normative procedures we will present serve to aid decision
makers through the complexities of their decision problems. The
role of the decision maker is in no way denigrated; as we shall see,
his beliefs and preferences are of absolutely paramount
importance.
(Anderson, Dillon, and Hardaker p.3).
OUTLINE

Pengertian dan
Elemen-Elemen Keputusan

Pengambilan Keputusan dalam

Kondisi Risiko (Risk)

Teori Keputusan Pengambilan Keputusan

dalam Kondisi Ketidakpastian
(Uncertainty)

Analisis Pohon Keputusan

DIAGRAM POHON PENGAMBILAN KEPUTUSAN

Probabilitas Ekonomi
1.180
(1) Boom (0,63)
Probabilitas Ekonomi
Krisis (0,37) 250
Membeli Saham BAT
Probabilitas Ekonomi
Boom (0,63) 2.000
? (2)
Probabilitas Ekonomi
300
Membeli Saham BATA Krisis (0,37)
Probabilitas Ekonomi
Boom (0,63) 4.463
(3)
Probabilitas Ekonomi 185
Membeli Saham MLBI Krisis (0,37)