Chapter 3 Decision theory - York University

Chapter 3 Decision INTRODUCTIOND ecision theory deals with methods for determining the optimal course ofaction when a number of alternatives are available and their consequencescannot be forecast with is difficult to imagine a situation which doesnotinvolve such decisionproblems, but we shall restrict ourselves primarily to problems occurring inbusiness, with consequences that can be described in dollars of profitorrevenue, cost or loss. For these problems, it may be reasonable to consideras the best alternative that which results in the highest profit or revenue,or lowest cost or loss, on the average, in the long run. This criterion ofoptimality is not without shortcomings, but it should serve as a useful guideto action in repetitive situations where the consequences are not critical.

amount one would be willing to pay to acquire itŒshould depend on the dif- ... the ticket is bought, the probability is 1/2 of a proÞtof$150, but there is an equal probability of a loss of $100. In their minds, the prospect of losing $100 may loom larger than that of gaining $150.

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