Background:Decision Making Under Uncertainty Scenario

Uncertainty state means it is a situation where it is not possible to assign any probability on the event under consideration. So what is the implication behind that challenge? The point is simple, if we cannot assign any probability, it means that it is not possible to estimate or forecast the occurrence of future events for we do not know the expected outcome which is also referred to as mean/or average.

In a case of uncertainty, there are particular decision criteria which are used to select the best alternative. Those criterion are;

  1. Maxi-Max Decision Rule
  2. Maxi-Min Decision Rule
  3. Min-max Regret Model
  4. Laplace Criterion of Rationality
  5. Mini-Max Regret Criterion

Maxi-Max Decision Rule

Maxi-Max Decision Rule-Is a decision criteria for risk takers

As the name suggests, it is a maximizing approach where by the decision maker selects the best results in each condition and out of the best selected the best of those best is picked.

Decision levels involved in this decision process;

Level one Decision: Prepare the payoff table

In this level, the payoff table portrays the net profit after we have considered selling price and relevant costs of a product

Level two Decision: Selection of the best performing option

In level two, we select the best performance in terms of payoff across the conditions given-ie Maxi

This process of selecting involves moving down the columns, each at a time as per the factor under consideration.

Level three Decision: Select the Best out the Best identified options

Select the best alternative amongst the best already selected in step two. This process of selecting involves moving across the row at the bottom line.

Example one

The sales manager is looking up to select the best price his company can use to sell its products.

So the decision to be made will be determined by the best of the best pay-off identified. Such that if given the following pay-off matrix;

Costs were as follows;

Variable cost $5

Salaries         $25,000

Required, using the maxi max decision rule, show the correct alternative.

Solution

Note that the best option in each category of prices is payoffs of 75,000; 70,400 and 65,750. Out of this three alternatives, 75,000 is the highest and hence it is the one selected as the maximum of the maximum