Decision Theory Under Risk | Operation Research | Calculation of Expected Monetary Value | In Hindi

Decision Theory Under Risk | Operation Research | Calculation of Expected Monetary Value | In Hindi

All Chapter of Operation Research:    • {In Hindi} All Topics of Operation Research  

"Decision theory under risk" refers to a framework in decision making where the possible outcomes of a choice are known, along with their associated probabilities, allowing the decision-maker to calculate the expected value or "utility" of each option and choose the one with the most favorable expected outcome, essentially making informed choices even when there is uncertainty involved.
Key points about decision theory under risk:
Known probabilities:
Unlike decision making under uncertainty, where probabilities are unknown, in "risk" scenarios, the likelihood of each potential outcome is understood.
Utility function:
Decision theory under risk often incorporates a "utility function" which reflects an individual's subjective value or preference for different outcomes, not just monetary values.
Expected utility:
The central concept is to calculate the "expected utility" of each option by multiplying the utility of each outcome by its probability and summing them up.
Decision rule:
The decision maker typically chooses the option with the highest expected utility, assuming they are rational and seek to maximize their overall benefit.
Example:
Imagine a company deciding whether to invest in a new product. They can estimate the potential profit or loss based on market research, giving them probabilities of different outcomes (high sales, moderate sales, low sales). By assigning utility values to these outcomes (based on company goals), they can calculate the expected utility of investing in the new product compared to not investing, helping them make an informed decision.
Important considerations:
Risk aversion:
Most people are considered "risk-averse," meaning they prefer a certain smaller gain over a potentially larger but uncertain gain. This can be incorporated into the utility function by assigning diminishing marginal utility to higher outcomes.
Bounded rationality:
While decision theory under risk assumes rational decision making, in real-world situations, individuals may have cognitive limitations and biases that affect their choices.


I hope this video will help you understand the concept of Decision Theory.
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