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Decision Making

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Decision Making Decision-making is based on information Information is used to: Identify the fact that there is a problem in the first place Define and structure the ... – PowerPoint PPT presentation

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Title: Decision Making


1
Decision Making
  • Decision-making is based on information
  • Information is used to
  • 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

2
Value of Information
  • The value of information used in decision making
    is
  • (value of the outcome with the Information)
    (value of the outcome without the Information)

3
Types of Decision
  • H. A. Simon classified decisions into
  • Programmed decisions
  • Non-Programmed decisions
  • Classified according to the extent to which
    decision making can be pre-planned
  • These are the extremes of a continuous range of
    decision types

4
Programmed Decisions
  • Also known as Structured Decisions
  • Characteristics
  • 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.

5
Non-Programmed Decisions
  • Also known as Unstructured Decisions
  • Characteristics
  • 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.
  • Semi-Structured Decisions
  • The most common type of decision
  • May be partially automated

6
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

7
Empowerment
  • Decisions should be made
  • 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

8
Empowerment
  • Enabled by systems such as
  • Customer Relationship Management (CRM)
  • Gives call centre staff specialist knowledge
    about any customer
  • Expert Systems
  • Assists non-experts in making complex decisions

9
Uncertainty
  • Uncertainty arises from incomplete information
    due to
  • Incomplete forecasting models
  • Conflicting data from external sources
  • Lack of time
  • Internal data on particular problem not collated
  • The uncertainty of an outcome is expressed as a
    probability

10
Rational Decision Making
  • The rational model of decision making is a
    mechanistic approach to decision making
  • It assumes perfect knowledge of all factors
    surrounding the decision

11
Rational vs. Real Decisions
  • 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

12
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

13
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

14
Example
  • The profit and loss figures (potential payoff)
    for the three products under the possible market
    conditions have been forecast as

Which one of the above projects should the
company run?
15
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
  • Maximax
  • Determine the highest possible profit from each
    strategy and choose that with the highest overall
    profit - Usually high risk, but high gain

16
Example
  • Preferred Project is?
  • Equally Likely
  • Maximax

17
Decision Criteria
  • Minimax
  • Choose that action with the smallest maximum
    possible loss, or the largest minimum profit.
  • Low risk, low gain.
  • Maximum Likelihood
  • 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.

18
Example
  • Preferred Project is?
  • Minimax
  • Max Likelihood

19
Example
20
Decision Criteria
  • Expected Value
  • A weighted average of all outcomes
  • The weights are probabilities
  • Gives the average value of the decision if it
    were made repeatedly
  • Uses all the information concerning events and
    their likelihood

21
Example
  • Calculate EV for each option/choice
  • Project A (8M0.6)(1M0.3)(-10M0.1) 4.1M
  • Project B (-20.6)(60.3)(120.1) 1.8
  • Project C (160.6)(00.3)(-260.1) 7.0
  • Preferred Project is?

C
22
Example 2
23
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
  • Can the company afford to lose 26M?

24
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

25
Decision Trees
  • Decision trees provide a means of structuring the
    decision making process to allow for alternative
    futures

26
Decision Tree
  • Two types of Node
  • Decision Node
  • Represent decision points
  • Decision are made by the organisation
  • Outcome Node
  • Linked to possible outcomes
  • These are uncontrollable

27
Example
28
Example
29
Example
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