19.2 DECISION MAKING UNDER UNCERTAINTY

In making decisions under certainty, the decision maker knows for sure which state of nature will occur, and he or she bases the decision on the optimal payoff available under that state. Decision making under uncertainty occurs when it is unknown which states of nature will occur and the probability of a state of nature occurring is also unknown. Hence, the decision maker has virtually no information about which state of nature will occur, and he or she attempts to develop a strategy based on payoffs.

Several different approaches can be taken to making decisions under uncertainty. Each uses a different decision criterion, depending on the decision maker's outlook. Each of these approaches will be explained and demonstrated with a decision table. Included are the maximax criterion, maximin criterion, Hurwicz criterion, and minimax regret.