DECISIONS UNDER

IGNORANCE
Decisions Under Ignorance

• What the weather will be like in the afternoon today?

• Rainy or sunny?
• Should we take an umbrella with us or should not take?
• We don't know the probabilities of to be rainy or sunny
Decisions Under Ignorance

• Such a decision we are facing is called a decision under ignorance.

• In decision theory ignorance is a technical term with a very precise meaning.
• It refers to cases in which the decision maker
(i) knows what his/her alternatives are (taking an umbrella or not taking it) and what outcomes
(getting wet or not getting wet) they may result in,
(ii) but they is unable to assign any probabilities to the states (rainy or sunny) corresponding to
the outcomes

• Sometimes the term «decision under uncertainty» is used.

An Example

• Jane is having a dinner with her friendin a newly opened restaurant.

Dominance

• When Jane is about to choose a main course, rationality forbids her to choose a3.
• This is because a2 will lead to a better outcome than a3.
Dominance

• Decision theorists say that alternative a2 dominates alternative a3.

• The widely accepted dominance principle prescribes that dominated acts must not be
chosen.
Another Example

• You think that having a valid ticket is better than not having one.
• This relation can be represented by 1 and 0.
• it can be clearly seen that a1 dominates a2.
Dominance

• We wish to formalise the idea that one alternative is better than another one.
• Let > be a relation on acts, such that ai > aj if and only if it is more rational to perform
act ai rather than act aj.
• This means that whenever ai > aj is true, then ai should to be chosen (rationally) over aj.
• Furthermore, ai >= aj means that ai is at least as rational as aj.
• And ai ~ aj means that the two acts are equally rational.
Dominance

• The dominance principle comes in two versions; the Weak and the Strong dominance principle.
• Weak Dominance articulates the plausible idea that one alternative is at least as rational as another if all its
outcomes, under every possible state of the world, will be at least as good as that of the other alternative.
• Strong Dominance stipulates that for an alternative to be more rational than another, two conditions must be
fulfilled.
• First, its outcomes under all states must be at least as good as those of the other alternative.
• Secondly, there must also be at least one state under which the outcome is strictly better than that of the
other alternative.
• For example, booking a ticket with Black Jack airlines strongly dominates booking a ticket with Air Mojave.
Dominance

• The dominance principle can also be applied to decisions under risk.

• Unfortunately, the dominance principle cannot tell the whole truth about decision making under
ignorance.
• It provides a partial answer.
• This is because it sometimes fails to single out a set of optimal acts.
• For example, in Janes decision at the restaurant in Santa Barbara, act a1 is not dominated by a2, nor is a2
dominated by a1.
• All that can be concluded is that it would not be rational to do a3.
• This means that some additional criterion is needed to reach a decision.
 DECISION MODELS

Decision Making Decision Making Decision Making

Under Certainty Under Risk Under Ignorance
(Uncertainty)

Minimax
Laplace Maximax Maximin Hurwicz
Regret
Criterion Criterion Criterion Criterion
Criterion
Decisions Under Ignorance

 If the probabilities of events cannot be determined in a decision problem, such problems are handled within
decision problems in case of uncertainty.
 In this type of decision problems; The evaluation of criteria and the choice between alternatives can be
influenced by many different criteria such as the manager's view of events and the policies of the business.
 In case of decision making under uncertainty problems;
✓ Laplace Criterion (Eş Olasılık Kriteri)
✓ Optimism (Maximax) Criterion (İyimserlik Kriteri)
✓ Pessimism (Maximin) Criterion (Kötümserlik Kriteri)
✓ Regret (Minimax) Criterion (Pişmanlık Kriteri)
✓ Hurwicz Criterion
are used.
1. Laplace Criterion

 Forthis criterion, the probability of occurrence of events is considered equal.

 If there are n events/situations, each can be assigned a probability of occurrence=1/n.
 Using these probabilities, we compute the expected payoff for each alternative.

Possible Revenues
33,3% 33,3% 33,3%
Factory Size T1 T2 T3
Small F1 80 60 25
Medium F2 20 120 40
Large F3 10 60 180
 1. Laplace Criterion

Possible Revenues
33,3% 33,3% 33,3%
Factory Size T1 T2 T3
Small F1 80 60 25
 Expected revenues are calculated :
Medium F2 20 120 40
• E(F1)= 80*0,33 + 60*0,33 + 25*0,33 = 55 Large F3 10 60 180
• E(F2)= 20*0,33 + 120*0,33 + 40*0,33 = 60
• E(F3)= 10*0,33 + 60*0,33 + 180*0,33 = 83,33 max. Revenue

• In the case of costs, the option with the minimum expected cost is preferred.
 2. Maximax Criterion

 This criterion, also known as the criterion of optimism, is used when the decision-maker is optimistic about future.
 Maximax implies the maximisation of maximum payoff.
 In this criterion, the decision maker is decided in such a way as to provide the most profit among the possible events.
 Example: If the problem addressed in the previous example is solved by maximax criterion;
Possible Revenues

Factory Size T1 T2 T3 Max.

Small F1 80 60 25 80
Medium F2 20 120 40 120
Large F3 10 60 180 180
 Once the maximum value for each alternative is found, the best of them is preferred.
 2. Maximax Criterion

 Example: In the case of costs, it is preferred to provide minimum cost.

Possible Costs

Factory Size T1 T2 T3 Min. Cost

Small F1 100 140 135 100

Medium F2 150 120 160 120
Large F3 110 160 210 110
 3. Maximin Criterion

 This criterion, also known as the criterion of pessimism, is used when the decision-
maker is pessimistic about future.
 Maximin implies the maximisation of minimum payoff.
 In this criterion, the decision maker chooses the best among the worst results.
 Example: Possible Revenues

Factory Size T1 T2 T3 Min.

Small F1 80 60 25 25
Medium F2 20 120 40 20
Large F3 10 60 180 10
 3. Maximin Criterion

 When it comes to costs;

 Example: If the problem addressed in the previous example is solved by maximin
criterion;
Possible Costs
Maximum
Factory Size T1 T2 T3
Cost
Small F1 100 140 135 140
Medium F2 150 120 160 160
Large F3 110 160 210 210
 4. Minimax (Regret) Criterion

 This criterion focuses upon the regret that the decision-maker might have from
selecting a particular course of action.

 Regret; is an opportunity (gain) loss that occurs when an option is decided under a
certain condition.

 In other words, regret is seen as the difference between the best possible result under
certain conditions and the actual results of the preferred option.
 4. Minimax (Regret) Criterion

 To implement this method, the decision maker must first prepare the regret table,
which turns the payments table into opportunity costs.

 Calculation of opportunity costs starts from events/situations (columns).

 4. Minimax (Regret) Criterion

 MR example; Durumlar
Şeçenekler 500 Çekim 750 Çekim 1000 Çekim
Yeni bir MR Ünitesi Satın Alma -15.000 200.000 300.000
Yeni iki MR Ünitesi Satın Alma -150.000 100.000 725.000
Dışarıdan Temin 15.000 22.500 40.000

 In case of 500 shots (1st column), the maximum revenue is 15.000 TL.
 A manager who chooses the outsourcing (dışarıdan temin) option will not have any
regrets when the demand amount is 500 shots.
Fırsat Kayıpları/Pişmanlıklar Durumlar
Şeçenekler 500 Çekim 750 Çekim 1000 Çekim
Yeni bir MR Ünitesi Satın Alma
Yeni iki MR Ünitesi Satın Alma
Dışarıdan Temin 0
 4. Minimax (Regret) Criterion

 However, if the decision maker had decided to buy a new MR unit, s/he would have
regretted for loss of 15,000 - (- 15,000) = 30,000 TL.
Durumlar
Şeçenekler 500 Çekim 750 Çekim 1000 Çekim
Yeni bir MR Ünitesi Satın Alma -15.000 200.000 300.000
Yeni iki MR Ünitesi Satın Alma -150.000 100.000 725.000
Dışarıdan Temin 15.000 22.500 40.000

Fırsat Kayıpları/Pişmanlıklar Durumlar

Şeçenekler 500 Çekim 750 Çekim 1000 Çekim
Yeni bir MR Ünitesi Satın Alma 30.000
Yeni iki MR Ünitesi Satın Alma
Dışarıdan Temin 0
 4. Minimax (Regret) Criterion

 However, if the decision maker had decided to buy two new MR unit, s/he would have
regretted for loss of 15.000-(-150.000)=165.000TL.
Durumlar
Şeçenekler 500 Çekim 750 Çekim 1000 Çekim
Yeni bir MR Ünitesi Satın Alma -15.000 200.000 300.000
Yeni iki MR Ünitesi Satın Alma -150.000 100.000 725.000
Dışarıdan Temin 15.000 22.500 40.000

Fırsat Kayıpları/Pişmanlıklar Durumlar

Şeçenekler 500 Çekim 750 Çekim 1000 Çekim
Yeni bir MR Ünitesi Satın Alma 30.000
Yeni iki MR Ünitesi Satın Alma 165.000
Dışarıdan Temin 0
 4. Minimax (Regret) Criterion

 For other columns (for 750 shots and 1000 shots) the same calculations are made and
then, the below table of opportunity losses is obtained.
Durumlar
Şeçenekler 500 Çekim 750 Çekim 1000 Çekim
Yeni bir MR Ünitesi Satın Alma -15.000 200.000 300.000
Yeni iki MR Ünitesi Satın Alma -150.000 100.000 725.000
Dışarıdan Temin 15.000 22.500 40.000

Fırsat Kayıpları/Pişmanlıklar Durumlar

Şeçenekler 500 Çekim 750 Çekim 1000 Çekim
Yeni bir MR Ünitesi Satın Alma 30.000 0 425.000
Yeni iki MR Ünitesi Satın Alma 165.000 100.000 0
Dışarıdan Temin 0 177.500 685.000
 4. Minimax (Regret) Criterion

 After the decision maker has created the regret table, the maximum regret values are
determined for each alternative.
 And then an alternative with a minimum regret value is preferred.
 The decision maker will have minimal regrets by choosing this way.

Fırsat Kayıpları/Pişmanlıklar Durumlar

En Büyük
Şeçenekler 500 Çekim 750 Çekim 1000 Çekim Pişmanlık
Yeni bir MR Ünitesi Satın Alma 30.000 0 425.000 425.000
Yeni iki MR Ünitesi Satın Alma 165.000 100.000 0 165.000
Dışarıdan Temin 0 177.500 685.000 685.000
 5. Hurwicz Criterion

 The maximax and the maximin criteria assumes that the decision-maker is either optimistic
or pessimistic.
 Decision makers may remain undecided between optimism and pessimism because of their
past experience.
 A more realistic approach would be to take into account the degree or index of
optimism or pessimism of the decision-maker in the process of decision-making.
 The Hurwitz criterion is based on the weighting of optimistic and pessimistic results.
 The weight value (α) takes a value between 0 and 1. (0≤α≤1)
 The decision maker first gives a weight to the optimistic result (α).
 In this case, (1-α) would naturally be the weight of the pessimistic result.
 5. Hurwicz Criterion

 The decision maker firstly determines the most optimistic and pessimistic results for
each decision alternative (for every row).
 Then, calculations are made using the determined α and (1- α) values:
α.(max. value in the row)+ (1- α).(min. value in the row)
Durumlar
Şeçenekler 500 Çekim 750 Çekim 1000 Çekim
Yeni bir MR Ünitesi Satın Alma -15.000 200.000 300.000
Yeni iki MR Ünitesi Satın Alma -150.000 100.000 725.000
Dışarıdan Temin 15.000 22.500 40.000
 5. Hurwicz Criterion

 In our example; It was assumed that the decision maker chose the weight α = 0.5 for
the optimistic result.
Durumlar
 In this case; (1- α)=0,5 Şeçenekler 500 Çekim 750 Çekim 1000 Çekim
Yeni bir MR Ünitesi Satın Alma -15.000 200.000 300.000
Yeni iki MR Ünitesi Satın Alma -150.000 100.000 725.000
Dışarıdan Temin 15.000 22.500 40.000

• Buying 1 MR unit=0,5x(300.000)+0,5x(-15.000)=142.500
• Buying 2 MR units=0,5x(725.000)+0,5x(-150.000)=287.500
• Outsourcing =0,5x(40.000)+0,5x(15.000)=27.500
 5. Hurwicz Criterion

 In order to check the sensitivity of this decision, re-calculations can be made by

changing the α value.

 Thus, it can be determined how the results change as α changes.