Treating Risk

The most common method for solving this analysis problem is to select the alternative with the greatest expected value. This approach dangerous becuase even an infintisimal chance or catastrophic loss can make the gains seem reasonable. But what happens if that small chance occurs?

Decision making under uncertainty

the decision maker considers situations in which several outcomes are possible for ech course of action.

does not know, cannot estimate the probability of occurance of the possible outcomes.

Insufficient information

involves assessment of the decision maker's attitude towards risk.

Knowledge Clasification Page 143

Decision situations are often clasified on the basis of what the decision maker knows or believes about the forecasted results.

• Certainty
• Risk
• Uncertainty

When models are used, any of these conditions can occur and different kinds of models are appropriate for each case.

Modeling with decision tables

A tabular representation of a decision.

wiki: http://en.wikipedia.org/wiki/Decision_table

Can model multiple criteria decisions

Features include:

• Decision variables (alternatives)
• Uncontrollable variables
• Result variables

Applies principles of certainty, uncertainty, and risk