5 main Assumptions required for formulation and solution of the decision matrix:

Some of the assumptions that are required for the formulation and solution of the decision matrix are;

1. The number of feasible alternative courses of action or strategies is limited and finite.

2. The number of possible states of nature is also limited and the probabilities assigned to all states of nature must add up to 1.

ADVERTISEMENTS:

3. Each state of nature is independent of the other so that only one event will occur for any given strategy.

4. The output comes for each combination of a strategy and its corresponding states of nature are known and are considered stable and constant for a given situation.

5. The objective of the decision maker is single and identified, either to maximize or to minimize a given objective function, which is expressed either in terms of expected payoff or cost or opportunity loss.

Under conditions of uncertainty, there is no knowledge of, the probabilities of the change events. Knowledge of these probabilities is what differentiates decisions under risk from those under uncertainty.

ADVERTISEMENTS:

The probabilities can be obtained from historical data, by market research or similar analyses, by intuitive or subjective assessment, or in the absence of any of these, by use of the Laplace principle.