Uncertainity and risks

Prabhat kiran bhandari

Roll no:131 B

BIM 7th

Overview of slide

O 1.probability theory

O 2.example

O 3. implication of probability theory in

decision making

O 4.decision making under uncertainity

Probability theory

Features

outcome of a given trial cannot be

predicted with certainty

Concerned with random phenomena

Example

O life expectancy for persons of a certain

age

O genetic disease occurring in a child of

parents having a known genetic makeup

Implication of probability

theory in decision makingO Expected monetary value criterion or

expected value criterion

O Expected oppurtunity loss criterion

O Expected profit with perfect information

O Marginal analysis approach

Expected monetary value

O Sum of product of pay-off values of each

strategy with assigned probabilities

EMV :payoff* probabilities

Expected profit with perfect information[EPPI]

O Complete information about future regards

O Highest profit can be obtained by

overcoming uncertainities

Marginal analysis approach

O Used when no. of alternatives are availiable

O It is made to avoid situation of creating pay off table and loss table

assumption:expected marginal

profit>=expected maginal loss

Where,expected marginal profit=probability of selling one additional unit*marginal profit

Expected marginal loss=probability of not selling one additional unit

Decision making under uncertainity

O Cannot precisely estimate successs or failure of

product

O Outcome is unknown.

Maximax or minimaxcriterion

Maximin or minimaxcriterion

Equally likely decision criterion

Criterion or realism

Criterion or regret

Workout example

Prduct

appearance

full Partial Minimal

Good 8 70 50

Fair 20 45 40

Poor -25 -10 0

Maximum 50 70 50

Solution

A)Under maximax criterion the company

should follow partial product line as it has

maximum value of rs.70000.

b)Under maximum criterion company should

follow minimal product line as it has

maximum 0.

Equal likelihood:probality=1/3

Where,no.of states=3

Solution of equal likelihood

Prob

abilit

y

Prod

uct

appe

aran

ce

Prod

uct

line

Full Parti

al

Mini

mal

1/3 Good 8 70 50

1/3 Fair 50 45 40

1/3 Poor -25 -10 0

EMV 11 35 30

O Under likelihood

criterion company

should follow partial

product line as it

has maximum

expexted value of

rs.35000

Any question????????