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DECISION THEORY
HURWICZ CRITERION
PRESENTED BY: SUBIN

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DECISION THEORY
Decision theory is concerned with determining
which decision, from a set of possible
alternatives, is optimal for a particular set of
conditions

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Examples of decision-theory problems.

Ford Motor Company must decide whether to purchase assembled door locks
for the 2008 Ford F-150 Harley-Davidson truck or to manufacture and
assemble the door locks at its Sandusky, Ohio, plant. If sales of the F-150 truck
continue to increase, it will be more profitable to manufacture and assemble
the parts. If sales level off or decline,it will be more profitable to purchase
the door locks assembled. Should it make or buy the door locks?

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DECISION THEORY
Steps involved in decision theory approach:
Determine the various alternative courses of actions from which the final
decision has to be made.
Identify the possible outcomes, called the states of nature or events
for the decision problem.
Construct a pay off table.
The decision maker chooses the criterion which results in largest pay off.

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Decision making environments:

Decision under certainty
Whenever there exists only one outcome for a decision, we are
dealing with this category
Decisions under uncertainty:
When more than one outcome can result from any single
i.e. more than one state of nature exists.

decision

Decision under risk:

The decision maker chooses from among several possible outcomes
where the probability of occurrence can be stated objectively from the
past data.
Decision under conflict:
Neither states of nature are completely known nor are they
completely uncertain.
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D.M. UNDER UNCERTAINITY:

Under condition of uncertainty, the decision maker has
knowledge about states of nature that happens but lacks
the knowledge about the probabilities of their
occurrence.
Under conditions of uncertainty, a few decision
criterions are available which could be of help to the
decision maker.

D.M. UNDER UNCERTAINITY

Maximax
Criterion or
Criterion of
optimism

Maximin
Criterion or
Criterion of
pessimism

Minimax
Criterion or
Regret
Criterion

Hurwicz
Criterion or
Criterion of
Realism

Laplace
Criterion or
Criterion of
Rationality

Hurwicz criterion
Or
Criterion of realism
Steps involved:
i.

Decide the coefficient of optimism and the coefficient of pessimism

The coefficient of optimism, defined as a measure of the decision maker's
optimism denoted by (alpha)
The coefficient of pessimism, is( 1 - )

ii. Determine the maximum as well as minimum pay off for each alterative
h= ( )x (maximum for each alterative) + (1-) x( minimum for each alterative)
iii. Select the alternative with highest value of h.

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Example:
A farmer wants to decide which of the three crops he should plant on his 100
Acre farm. The profit from each is dependent on the rainfall during the growing
seasons. The farmer has categorized the amount of rainfall as high, medium,
low. His estimated profit for each is show in the table:
Rainfall

Crop A

Crop B

Crop C

High

8000

3500

5000

Medium

4500

4500

5000

Low

2000

5000

4000

If the farmer wishes to plant only one crop, decide which will be his choice using

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Rainfall

Crop A

Crop B

Crop C

High

8000

3500

5000

Medium

4500

4500

5000

Low

2000

5000

4000

Hurwicz criterion:
Assuming degree of optimism = 0.6 and therefore 1- = 0.4 , the value
of h is calculated in the table:
Crop A=(8000*.6)+(2000*.4)= 5600
Crop B=(5000*.6)+(3500*.4)=4400
Crop C=(5000*.6)+(4000*.4)=4600
Alternativ Maximum Minimum
e
pay off
pay off

Crop A

8000

2000

5600

Crop B

5000

3500

4400

Crop C

5000

4000

4600

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The maximum value is 5600 so this criterion selects crop A.

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Thank you!

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