Decision-Making Under Conditions of Certainty

Conditions of certainty tend to be rare, especially when significant decisions are involved. Under conditions of certainty, decision is very easy.

Example 

An investment analyst must make a decision about investing in one of the three investment portfolio packages. Each investment portfolio contains different proportions of common stock, industrial bonds and real estate. The table below gives the gains of investing in these portfolios under different states of nature S1, S2 and S3 based on the projection of changes in stock prices, yields on bonds and appreciation in real estate values.

Strategy: Investment in Portfolio S1 Rs S2 Rs. S3 Rs. A 20,000 2,000 1,000 B 30,000 27,000 -16,000 C 40,000 15,000 -40,000

Under conditions of certainty we have to choose that alternative which gives us the maximum profit. Thus, in the state of nature, S₁, the analyst decides to invest in portfolio C and S₂ in portfolio B and S₃ in portfolio A because that alternative gives the analyst the maximum benefit in that particular state.

 

Posted Date: 9/15/2012 2:10:26 AM | Location : United States

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