Ingredients of Decision Problem

In any organization the main function of the executive is to make decisions. The organization is faced with several types of decision problems such as: Should a new product be introduced in the market? How many units of a product should be produced? How many units of product should be marketed? How many units of a particular machine part or raw materials should be kept in stock? The decision – marker has to face such endless problems. In each so such decision – making problems, there are certain common elements which are called ingredients of decision problems.
These ingredients are:

First, the process of decision-making involves the selection of a single act from among some set of alternative acts. Decision is needed in a problem situation where two or more alternative courses of action are available, and where only one of these actions can be taken. Obviously, if there is only one course of action available, no decision is required since that action must be taken in order to solve the problem. For the sake of simplicity the possible actions are symbolized by a₁, a₂, a₃…. etc. The totality of all possible actions is called action space denoted by A (a₁, a₂, a₃). The decision procedure involves selecting among the alternatives a single course of action that can actually be carried out. If such a course of action is selected that cannot be carried out in the existing situation and circumstance, it will tantamount to waste of time and resources. Quite often the objective of precision is to select an act which will accomplish some predestinated purpose. The decision taken may be regarded as satisfactory or not depending upon whether it has helped in the attainment of the objective.

Secondly, in all decision problems ‘uncertainty’ is found to be the common element. When the outcome of some action is not known in advance, the outcome is said to be uncertain. When there many possible outcomes of an event (also called states of nature), one cannot predict with certainty what will happen – it is only in terms of probabilities we may be able to talk. The term “state of nature” does not mean nature in the ordinary sense of the word. It is a general term which is used to encompass all those factors beyond the control of the decision-maker that affect the outcome of his decision. It may be pointed out that sometimes a distinction is made between decision-making under “risk” and decision-making under “uncertainty”. When the state of nature is unknown, but objective or empirical data is available so that the decision-maker can use these data to assign probabilities to the various states of nature of procedure is generally referred to as decision-making under ‘risk’. When the state of nature is unknown and there is no objective information on which probabilities can be based, the procedure is referred to as decision-making under ‘uncertainty’.

Lastly, a number of consequences result for each action under different conditions, the condition nature being various states of nature. In general if there are m possible actions and n admissible states of nature, the consequences will be m x n in number. In practical situation, particularly in business and economic problems, consequences can be expressed in terms of money and utility.
The consequences may be evaluated in several ways such as:

(i)    in terms of profits,

(ii)    in terms of costs, and

(iii)    in terms of opportunity losses.

In most decision problems the expected monetary value is used as a decision criterion. When consequences are evaluated in terms of profits they are called payoffs.

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