Q.Distinguish between decision-making under risk and decision-making under uncertainty. Among the four criteria studied for decision-making under uncertainty, which is the most optimistic, and which is the most conservative?

The distinction between 'risk' and 'uncertainty' in decision theory turns entirely on whether the probabilities of the states of nature are known, and the four uncertainty criteria range from an optimist's best-case view to a pessimist's worst-case view. …

Decision-making under risk applies when the probabilities of the various states of nature ARE known (from past records, market surveys, statistical estimation, etc.). In this situation, the Expected Monetary Value (EMV) criterion, which weights each payoff by its probability, is used.

Decision-making under uncertainty applies when these probabilities are NOT known at all. In this situation, four criteria not requiring any probability figures are used instead: Maximax, Maximin, Minimax Regret, and Laplace.

Among these four uncertainty criteria:

• Maximax is the most optimistic — it assumes the best possible outcome will occur for whichever action is chosen, and picks the action with the highest best-case payoff. …

Thinking 'risk' means a riskier or bolder decision-maker attitude — in decision theory 'risk' is a technical term meaning the probabilities of the states of nature ARE known, which is actually the more favourab …