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Payoff Table With Tables

A payoff table is a crucial tool in decision-making under uncertainty, illustrating potential outcomes of various strategies based on different states of nature. It consists of decision alternatives, states of nature, and corresponding payoffs, aiding systematic decision-making and comparison. The table's construction involves identifying alternatives and states, estimating payoffs, and it can be analyzed using criteria like Maximax, Maximin, and Expected Monetary Value.

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15 views3 pages

Payoff Table With Tables

A payoff table is a crucial tool in decision-making under uncertainty, illustrating potential outcomes of various strategies based on different states of nature. It consists of decision alternatives, states of nature, and corresponding payoffs, aiding systematic decision-making and comparison. The table's construction involves identifying alternatives and states, estimating payoffs, and it can be analyzed using criteria like Maximax, Maximin, and Expected Monetary Value.

Uploaded by

jashanpreetk05062005
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Payoff Table in Operations Research

1. Introduction

In decision-making under uncertainty, a payoff table (also called payoff matrix) is an important tool. It helps

decision-makers understand the possible outcomes (payoffs or losses) of various decisions or strategies

under different states of nature.

In simple words, a payoff table shows how much profit (or cost) you will earn (or incur) when you choose a

particular decision and a particular event happens.

2. Key Terms

- Decision alternatives: The options or strategies available to the decision-maker.

- States of nature: The possible future events or outcomes.

- Payoffs: The outcomes (profit or cost) resulting from each decision-state combination.

3. Characteristics of a Payoff Table

- Tabular representation

- Rows = decision alternatives

- Columns = states of nature

- Cells = payoffs

4. Why Use a Payoff Table?

- Helps in systematic decision-making

- Easy comparison

- Useful under uncertainty

- Base for techniques like Maximin, Maximax, EMV etc.

5. How is a Payoff Table Constructed?

Step 1: Identify Decision Alternatives

Step 2: Identify States of Nature


Payoff Table in Operations Research

Step 3: Estimate Payoffs

Step 4: Construct the Table

6. Example of Constructing a Payoff Table

A company wants to launch a new product with 3 options:

1. Small Scale

2. Medium Scale

3. Large Scale

States of demand: Low, Moderate, High

Payoffs (in Rs. lakhs):

Small: 20, 25, 30

Medium: 10, 40, 60

Large: -20, 30, 100

Payoff Table (in Rs. lakhs)

Decision Alternative Low Demand Moderate Demand High Demand

Small Scale 20 25 30

Medium Scale 10 40 60

Large Scale -20 30 100

7. Decision Criteria Using the Payoff Table

(a) Maximax: Choose highest maximum -> Large Scale (100)

(b) Maximin: Choose highest minimum -> Small Scale (20)

(c) Minimax Regret: Calculate regrets -> Medium or Large Scale (40)

(d) Expected Monetary Value:

Probabilities: Low = 0.2, Moderate = 0.5, High = 0.3

Small: 25.5, Medium: 40, Large: 41 -> Best is Large Scale

Regret Table (in Rs. lakhs)


Payoff Table in Operations Research

Decision Alternative Low Demand Moderate Demand High Demand

Small Scale 0 15 70

Medium Scale 10 0 40

Large Scale 40 10 0

8. Limitations of a Payoff Table

- Requires accurate estimates

- Complex with many options

- Ignores qualitative factors

9. Conclusion

A payoff table is a useful tool in Operations Research for decision-making under uncertainty. It helps visualize

all outcomes and supports choosing the best strategy using several criteria.

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