discuss any three methods of dealing with uncertainty.

discuss any three methods of dealing with uncertainty. Illustrate with relevant examples .

Ans. Uncertainty is a situation where there is more than one possible outcome to a decision but the probability of each specific outcome occurring is not known or event meaningful. This may be due to insufficient information or instability in the nature of variables. In extremes cases of uncertainty, the outcomes may be uncertainty is necessary subjective.

Decision making under uncertainty:-

In this care the probabili9ties associated with the different state of nature are unknown. Moreover, there is no previous date of information available which could allot the probability of the occurrence of states of nature. As such they decision ,makes cannot calculate the expected pay-off for the course of action. The decision maker faces problem when he desires to introduce new plan of production. A number of decision criteria have been provided for decision making under such state of nature. Each of these criteria makes an assumption about the extent to which a decision makes is an optimist or pessimist. There exists another criterion for a decision maker who compromise between optimism and pessimism. Hence “Decision criterion under uncertainty depends on the attitude of the decision make. The decision maker may choose any one of the following

1. Maxi min
2. Maxi max
3. Mini max Regret

1. Maxi min:- The course of action that maximize the minimum possible pay-off is selected. The decision maker lists down the minimum outcome within each course of action and then selects the strategy with the minimum number. This is also known as a pessimistic decision criterion as it locates the strategy having least loss.

Suppose, the maximum pay off of each course of action are

a1 : 40 Since the course of action a4 has the maximum pay-off so the
a2 : 42 decision maker will select this alternative.
a3 : 44
a4 : 46


2. Maxi max :- In this case the course of action that maximizes the maximum pay-off is taken . The decision maker lists down the maximum pay-off associated with each course of action then selects that alternative having maximum number.

This may be called an optimistic decision criterion as the decision decision maker selects the alternative of highest possible gain.

Suppose, the maximum pay- off each course of action are:

a11 : 40 Since the course of action a4 has the maximum pay off so
a2 : 42 the decision maker will select this alternative.
a3 : 44
a4 : 46



3. Mini max Regret : The regret (i.e opportunity loss) for each course of action are to be calculated with reference to the list pay off various alternative acts. Now obtain the maximum regret and hence select course of action with the minimum of the maximum regret values.