Decision Theory

DECISION THEORY

Introduction:

Decision theory is primarily concerned with helping people and organizations in making decisions. It provides a meaningful conceptual frame work for important decision making. The decision making refers to the selection of an act from amongst various alternatives, the one which is judged to be the best under given circumstances.

The management has to consider phases like planning, organization, direction, command and control. While performing so many activities, the management has to face many situations from which the best choice is to be taken. This choice making is technically termed as “decision making” or decision taking. A decision is simply a selection from two or more courses of action. Decision making may be defined as - “ a process of best selection from a set of alternative courses of action, that course of action which is supposed to meet objectives upto satisfaction of the decision maker.”

The knowledge of statistical techniques helps to select the best action. The statistical decision theory refers to an optimal choice under condition of uncertainty. In this case probability theory has a vital role, as such, this probability theory will be used more frequently in the decision 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.