Decision Making under Risk

In real life situations, it is rare that the demand and supply environment, for that matter, any other environmental parameter is known with certainty. These variations can be due to variability of factors inside and even outside the environment. Under such conditions, one can only guesstimate the environment. The probabilities of occurrences of different responses due to a single attributed consequence are computed. The expected value of response can then be obtained which provide a single measure of the probability of occurrence.  Based on these probabilities, the best possible strategy alternative is selected giving the best measure of expected response. This probabilistic approach of decision making is termed as decision making under risk.

The framework of decision making under risk is most appropriate for short and intermediate time range problems. Under such conditions, the assessment of probabilities can be made with fair degree of accuracy. With expanding time horizon, the assessment of probabilities becomes increasingly hazardous.