Decision

A decision involves coming to a conclusion about a course of action or an issue. The complex process of decision making involves many factors. A decision situation most often involves alternative courses of action and possible future events. The field of decision theory provides a rational framework for many decision situations.

Most decision making occurs under conditions of uncertainty. This means that the possible future events, referred to in decision theory as states of nature, are not known. In this case, the decision maker may be able to identify the possible states of nature and estimate the likelihood that each will occur.

A decision matrix can then be constructed, with the decision alternatives represented by rows and the possible states of nature, and their associated probabilities, represented by columns. Each cell in the matrix represents a decision–outcome combination, and the “payoff” of each combination can be recorded in the matrix. The payoff may represent dollars in profit or savings, or some other performance measure associated with the decision.

The decision matrix just described provides a framework to analyze the decision alternatives, but the final decision is often influenced by the propensity of the decision maker for risk taking.

When a series of decisions must be made in sequential fashion, a decision tree can be constructed to show the series of decision options and resulting states of nature. Each branch along the tree represents a combination of decisions and outcomes. Analysis of each branch results in the expected payoff of each sequence of decisions.