1. Expansion of the present plant
2. Construction of a new plant
3. Subcontracting the production for extra demand.
Step 2. Establish the expected future events
In a second phase, the decision maker should identify all the likely future events
that will affect his options. It is often possible to ascertain most of the events that can
happen, but the real difficulty is to pinpoint which specific event will take place.
Unfortunately, these potential future events are not within the control of the manager. In decision theory, they are known as states of nature. Only one of the events,
out of this list, will happen, of course. If it is considered that the greatest uncertainty,
for this company, will be about product demand, the likely events with respect to the
demand may be:
1. High demand
2. Moderate demand
3. Low demand
4. No demand.
Step 3. Construct a payoff table
A payoff table (table representing profit, benefit, etc.) is next set up by the
decision maker for each of the possible combinations of (1) alternative course of
action and (2) state of nature. Table 16.1 shows 12 possible payoffs for the above
decision problem.
Step 4. Select optimum decision criterion
Finally, the decision maker should select a criterion which results in the largest
payoff to him. The criterion chosen may be qualitative, quantitative or economic,
(e. g., fragrance of a perfume, profit, market share etc.).
16.3 Decision Making Environments
Decisions are taken under three varieties of environments:
1. Decision making under conditions of certainty
In this environment, everything is known – there is only one state of nature – there
is complete certainty about future events. Analysis of the situation is easy and a
correct decision may be taken.
2. Decision making under conditions of uncertainty
Here, there are more than one states of nature. Furthermore, the decision maker
does not have enough data or knowledge to permit him set probabilities to the
different states of nature.
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16 Decision Taking with Infrastructure
2. Construction of a new plant
3. Subcontracting the production for extra demand.
Step 2. Establish the expected future events
In a second phase, the decision maker should identify all the likely future events
that will affect his options. It is often possible to ascertain most of the events that can
happen, but the real difficulty is to pinpoint which specific event will take place.
Unfortunately, these potential future events are not within the control of the manager. In decision theory, they are known as states of nature. Only one of the events,
out of this list, will happen, of course. If it is considered that the greatest uncertainty,
for this company, will be about product demand, the likely events with respect to the
demand may be:
1. High demand
2. Moderate demand
3. Low demand
4. No demand.
Step 3. Construct a payoff table
A payoff table (table representing profit, benefit, etc.) is next set up by the
decision maker for each of the possible combinations of (1) alternative course of
action and (2) state of nature. Table 16.1 shows 12 possible payoffs for the above
decision problem.
Step 4. Select optimum decision criterion
Finally, the decision maker should select a criterion which results in the largest
payoff to him. The criterion chosen may be qualitative, quantitative or economic,
(e. g., fragrance of a perfume, profit, market share etc.).
16.3 Decision Making Environments
Decisions are taken under three varieties of environments:
1. Decision making under conditions of certainty
In this environment, everything is known – there is only one state of nature – there
is complete certainty about future events. Analysis of the situation is easy and a
correct decision may be taken.
2. Decision making under conditions of uncertainty
Here, there are more than one states of nature. Furthermore, the decision maker
does not have enough data or knowledge to permit him set probabilities to the
different states of nature.
446
16 Decision Taking with Infrastructure