The Laplace’s insufficient reason criterion postulates that if no information is available about the
probabilities of the various outcomes, it is reasonable to assume that they are likely equally.
decision maker calculate the expected payoff for each alternative and select the alternative with the
largest value. The use of expected values distinguishes this approach from the criteria of using only
extreme payoffs. This characteristic makes the approach similar to decision making under risk.
The Laplace’s criterion is the first to make explicit use of probability assessments regarding the
likelihood of occurrence of the states of nature. As a result, it is the first elementary model to use all of
the information available in the payoff matrix.
The Laplace’s argument makes use of Jakob Bernoulli's Principle of Insufficient Reason. The
principle, first announced in Bernoulli's posthumous masterpiece, Ars Conjectandi (The Art of
Conjecturing, 1713), states that “in the absence of any prior knowledge, we should assume that the
events have equal probability". It meas that the events are mutually exclusive and collectively
exhaustive. Laplace posits that, to deal with uncertainty rationally, probability theory should be
invoked. This means that for each state of nature (S
j
in S), the decision maker should assess the
probability of p
j
that S
j
will occur. This can always be done - either theoretically, empirically or
subjectively. Laplace decision rule is followed:
1. Assign p
j
= P (S
j
) = 1/n to each S
j
in S, for j = 1, 2, ..., n.
2. For each A
i
(payoff matrix row), compute its expected value: E (A
i
) = Σ
j
p
j
(R
ij
).
for
i = 1, 2, ...,
m. Since
p
j
is a constant in Laplace, E (A
i
) = Σ
j
p
j
(R
ij
) = p
j
Σ
j
R
ij
.
3. Select the action alternative with the best E (A
i
) as the optimal decision. "Best" means max for
positive-flow payoffs (profits, revenues) and min for negative-flow payoffs (costs)
(http://groups.msn.com/DecisionModeling/decisionanalysis.msnw).
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