making theory under uncertainty and risk. The statistical decision theory tries to reveal the logical structure of the problem into alternative action, states of nature, possible outcomes and likely pay-offs from each such outcome. Let us explain the concepts associated with the decision theory approach to problem solving. .
. Meaning The decision maker : The decision maker refers to individual or a group of individual responsible for making the choice of an appropriate course of action amongst the available courses of action. Acts (or courses of action ): Decision making problems deals with the selection of a single act from a set of alternative acts. If two or more alternative courses of action occur in a problem, then decision making is necessary to select only one course of action.
Let the acts or action be a , a , a ,… then the totality of all these actions is known as action space denoted by A. For three actions a , a a ; A = action space = (a , a , a ) or A = (A , A , A ). Acts may be also represented in the following matrix form. Acts (or) Acts A A … A n A A … A n In a tree diagram the acts or action are shown as A A A Start XII Std - Business Maths & Stat EM Chapter - - Events (or States of nature): The events identify the occurrences, which are outside of the decision maker’ s control and which determine the level of success for a given act.
These events are often called ‘ States of nature’ or outcomes. An example of an event or states of nature is the level of market demand for a particular item during a stipulated time period. A set of states of nature may be represented in any one of the following ways: S = {S , S , …,S n } or E =