Professional Documents
Culture Documents
Identify the fact that there is a problem in the first place Define and structure the problem Explore and choose between different possible solutions Evaluate the effectiveness of the decision
Value of Information
(value of the outcome with the Information) (value of the outcome without the Information)
Types of Decision
Classified according to the extent to which decision making can be preplanned These are the extremes of a continuous range of decision types
Programmed Decisions
Repetitive, routine, known rules or procedures, often automated, can be delegated to low levels in the organisation, often involve things rather than people Examples - Inventory control decisions, machine loading decisions, scheduling.
Non-Programmed Decisions
Novel, non-routine, rules not known, high degree of uncertainty, cannot be delegated to low levels, more likely to involve people. Examples - Acquisitions, mergers, launching new products, personnel appointments. The most common type of decision May be partially automated
Semi-Structured Decisions
Empowerment
Authority to take decisions is being delegated down the line especially in modern service industries This process is called empowerment and should enable an organisation to take a variety of decisions more quickly, thus providing a more flexible service
Empowerment
At the lowest possible level, which accords with their nature As close to the scene of the action as possible at the level that ensures none of the activities and objectives are forgotten
Empowerment
Gives call centre staff specialist knowledge about any customer Assists non-experts in making complex decisions
Expert Systems
Uncertainty
Incomplete forecasting models Conflicting data from external sources Lack of time Internal data on particular problem not collated
The rational model of decision making is a mechanistic approach to decision making It assumes perfect knowledge of all factors surrounding the decision
Users tend to explain their actions in terms of rational behaviour, whereas their actual performance may be governed by intuition rather than by rational analysis. Studies of managers at work have shown that there is a discrepancy between how managers claim to take decisions and their actual observed decision-making behaviour. Argyris and Schon
Payoff Matrices
The standard way to analyse simple decision problems These are constructed as follows:
Identify all available options Identify events which cause an outcome (states of nature) Estimate the likelihood of each state of nature Estimate the value/payoff of each outcome Determine the expected value for each option Choose the option with the highest expected value
Example
A company must decide on one of three development projects, A, B or C They have identified three possible events relating to market conditions that will effect this decision
Probability 60% 30% 10%
Example
The profit and loss figures (potential payoff) for the three products under the possible market conditions have been forecast as:
D e c is io n Event Boom 60% S te a d y S ta te 3 0 % R e c e ss io n 1 0 % P ro je c t A +8M +1M -1 0 M P ro je c t B -2 M + 6M + 12M P ro je c t C + 16M 0 -2 6 M
Decision Criteria
In order to evaluate the alternatives, managers use a number of different criteria: Equally Likely
The consequences of each decision are summed and the result divided by the number of events Useful if probabilities are not known Determine the highest possible profit from each strategy and choose that with the highest overall profit - Usually high risk, but high gain
Maximax
Example
Decision Event Boom 60% Steady State 30% Recession 10% Project A +8M +1M -10M Project B -2M +6M +12M Project C +16M 0 -26M
Decision Criteria
Minimax
Choose that action with the smallest maximum possible loss, or the largest minimum profit. Low risk, low gain. Choose the most likely event and then choose the best strategy for that event. Low risk, low gain. Does not make full use of available information.
Maximum Likelihood
Example
Decision Event Boom 60% Steady State 30% Recession 10% Project A +8M +1M -10M Project B -2M +6M +12M Project C +16M 0 -26M
Example
Decision Event Boom 60% Steady State 30% Recession 10% Project A +8M +1M -10M Project B -2M +6M +12M Project C +16M 0 -26M
Decision Criteria
Expected Value
Gives the average value of the decision if it were made repeatedly Uses all the information concerning events and their likelihood
Example
Decision Event Boom 60% Steady State 30% Recession 10% Project A +8M +1M -10M Project B -2M +6M +12M Project C +16M 0 -26M
Example 2
A lte r n a t iv e AA r n a t iv e AB r n a t iv e C lte lte
y y y O u tc o m e :P r o b P r o fit P r o b P r o fit P r o b P r o fit
Decision Criteria
Expected Value
Uses all the information concerning events and their likelihood Does not take into account decision-makers attitude to risk Does not reflect the actual outcomes in the figures
Decision Trees
Not all decisions will be taken in isolation A decision will have an effect of future events and outcomes An outcome in turn may effect future decision making
Decision Trees
Decision trees provide a means of structuring the decision making process to allow for alternative futures
Decision Tree
Represent decision points Decision are made by the organisation Linked to possible outcomes These are uncontrollable
Outcome Node
Example
Boom 60% Steady 30% Project A Boom 60% Project B Steady 30% Recession 10% Boom 60% Steady 30% Recession 10% -26M Recession 10% 8M 1M -10M -2M +6M +12M +16M 0
Project C
Example
Boom 60%
4.1
Project A
Project B
1.8
Project C
7
Example
Boom 60%
4.1
Project A
4.1
Project B
1.8
Project C
7