HW32972

PROGRAM: BBA SEM 3/4: 2023-24
SUBJECT: MARKETING RESEARCH

UNIT 3
DECISION THEORY AND TREE

Decision Theory
Decision theory is principle associated with decisions. Contemporary decision theory was
developed in the mid of the 20th century with the support of several academic disciplines.
Decision theory is typically followed by researchers who pinpoint themselves as economists,
statisticians, psychologists, political and social scientists or philosophers. Decision theory
provides a formal structure to make rational choices in the situation of uncertainty. Given a set
of alternatives, a set of consequences, and a correspondence between those sets, decision theory
offers conceptually simple procedures for choice. The origin of decision theory is derived from
economics by using the utility function of payoffs. It proposes that decisions be made by
computing the utility and probability, the ranges of options, and also lays down strategies for
good decision.
Decision theory is a set of concepts, principles, tools and techniques that help the decision
maker in dealing with complex decision problems under uncertainty. More specifically,
decision theory deals with methods for determining the optimal course of action when a number
of alternatives are available and their consequences cannot be forecasted with certainty.
Decision theory problems are categorized by the following:
1. A decision criterion
2. A list of alternatives
3. A list of possible future events (states of nature)
4. Payoffs associated with each combination of alternatives and events
5. The degree of certainty of possible future events
Solution to any decision problem include following steps:
1. Identify the problem
2. Specify objectives and the decision criteria for choosing a solution
3. Develop alternatives
4. Analyse and compare alternatives
5. Select the best alternative
6. Implement the chosen alternative
7. Verify that desired results are achieved
Decisions in stages, decision trees:

In many instances, the choice of the best act is not made in one stage, and the decision problem
involves a sequence of acts, events, acts, events. There may be a number of basic alternatives,
each leading to one of a number of situations depending on the outcome of a certain random
process. At each such situation, a number of other alternatives may be available which also
lead to a new set of situations depending on another set of events and so on, with acts followed
by events, followed by acts, events. Discrete decision theory problems can be represented
pictorially using decision tress. It chronically portrays the sequence of actions and events as
they unfold. In below figure, square symbol precedes the set of actions that can be taken by
decision maker. The round node precedes the set of events or states of nature that could be
encountered after decisions is made. The nodes are connected by branches.
Analysis of Decision Trees: After the tree has been drawn, it is scrutinized from right to left.
The aim of analysis is to determine the best strategy of the decision maker that means an
optimal sequence of the decisions. To analyse a decision tree, managers must know a decision
criterion, probabilities that are assigned to each event, and revenues and costs for the decision
alternatives and the chance events that occur.
There are two possibilities to how to include revenues and costs in a decision tree. One
possibility is to assign them only to terminating nodes where they are included in the
conditional value of the decision criterion associated with the decisions and events along the
path from the first part of the tree to the end. However, it can be appropriate to assign revenues
and costs to branches. This reduces the required arithmetic for calculating the values of the
decision criterion for terminating nodes and focuses attention on the parameters for sensitivity
analysis.
Benefits of Decision Trees
They enable to obtain a visual portrayal of sequential decisions, i.e. they picture a series of
chronological decisions. Decision tree are universal, they make more accurate the structure
of the decision process and facilitate a communication among solvers of the decision
problem. Decision tree force the decision maker to appreciate all consequences of his
decisions. Construction and analysis of decision trees by means of computers makes
possible to experiment with decision trees and quickly to establish the impact of changes
in the input parameters of the tree on the choice of the best policy.
Limitations of decision trees:
Only one decision criterion can be considered.
The decision tree is an abstraction and simplification of the real problem. Only the
important decisions and events are included.
Managers cannot use decision trees if the chance event outcomes are continuous. Instead,
they must redefine the outcomes so that there is a finite set of possibilities.
The significant result of the analysis of a decision tree is to choose the best alternative in
the first stage of the decision process. After this stage, some changes in the decision
situations can come, an additional information can be obtained, and usually, it is essential
to actualize the decision tree and to determine a new optimal strategy. This procedure is
required before every further stage.
Theoretical studies have revealed that decision theory is a formal study of rational decision
making formed largely by the joint efforts of mathematicians, philosophers, social
scientists, economists, statisticians and management scientists (Jeffrey 1992). While
decision theory has history of applications to real world problems in many disciplines,
including economics, risk analysis, business management, and theoretical behavioural
ecology, it has more recently gained acknowledgment as a beneficial approach to
conservation in the last 20 years (Maguire 1986).
To summarize, Decision theory is a Structure of logical and mathematical concepts which
is intended to assist managers to formulate rules that may lead to a most beneficial course
of action under the given circumstances. Decision theory divides decisions into three
categories that include Decisions under certainty; where a manager has far too much
information to choose the best alternative, Decisions under conflict; where a manager has
to anticipate moves and countermoves of one or more competitors and lastly, Decisions
under uncertainty; where a manager has to dig-up a lot of data to make sense of what is
going on and what it is leading to. It is established that decision theory can be applied to
conditions of certainty, risk, or uncertainty. Decision theory identifies that the ranking
produced by using a criterion has to be consistent with the decision maker's objectives and
preferences.
BIBLIOGRAPHY:
https://www.civilserviceindia.com/subject/Management/notes/decision-theory.html
https://www.researchgate.net/publication/256303889_Statistical_guidelines_for_Apis_mellif
era_research/figures?lo=1
https://www.tutor2u.net/psychology/store/selecting-a-statistical-test-classroom-poster
Fill in the blanks:
1. Decision theory is a field of study that deals with the process of making choices when
faced with ____________ situations.
2. A decision tree is a visual representation of a decision-making process that uses
branches and nodes to depict different ____________ and their consequences.
3. In decision theory, a decision maker often considers both the ____________ and the
probabilities of different outcomes when making choices.
4. In a decision tree, the starting point is typically represented by a ____________ node,
where a decision is to be made.
5. Chance nodes in a decision tree represent events or situations with ____________
outcomes, which are uncertain
6. The goal of using a decision tree is to calculate the ____________ expected value for
each decision path, helping decision-makers choose the best course of action.
7. A ____________ analysis is a technique used to determine the best decision in a
decision tree by comparing the values of different branches.
8. Decision trees are widely used in fields such as finance, business, and medicine to aid
in complex decision-making, particularly in scenarios with multiple ____________.
9. The decision tree provides a structured approach to assess trade-offs between different
____________ in a decision-making process.
10. Decision theory and decision trees are essential tools for optimizing choices, whether
in business strategy, investment decisions, or even personal ____________.
Answers:
1. Uncertain
2. Decisions or Options
3. Payoffs or Consequences
4. Decision
5. Probabilistic or Uncertain
6. Expected or Anticipated
7. Sensitivity or Sensitivity Analysis
8. Alternatives or Options
9. Scenarios or Choices
10. Life Decisions or Personal Choices

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PROGRAM: BBA SEM 3/4: 2023-24

SUBJECT: MARKETING RESEARCH

DECISION THEORY AND TREE

Decisions in stages, decision trees:

Fill in the blanks:

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