This module is based on Chapter 13 through p. 560 of the textbook . However, these LP models were all formulated under the assumption that certainty exists. It is assumed that all of the model coefficients, constraint values, and solution values are known with certainty and do not vary. Decisions are often made within an environment of risk , uncertainty , or conflict .
Decision theory is concerned with decision making under conditions of risk and uncertainty.
Game theory, which will not be discussed, is concerned with decision making under conflict. The first step in the decision analysis is to identify the alternatives considered by the decision maker. Of course, the selection of the best decision alternative depends on how much profit the investor will make from each decision. Profit will depend on the future events associated with a decision situation. A decision maker may have an idea of possible future events, but it is uncertain which particular event will occur.