Activity 3

POM Insight: Decision Theory

Every business owner deals with a lot of processes. Each of these instances requires an
immediate response whereas others require a lot of time before a decision is made. To whatever
extent, critical decisions must be derived from a thorough thinking and planning approach. It is
imperative that every decision relates to our best intentions in achieving the company’s objective.
All of these choices a company made relates to the concept of decision theory. This theory
understands the factors and its influences to the choices of consumers, professional and ultimately,
the one who manages a business. There are various significant factors that influence our business
decisions. Few of these are the risks, the available resources, current data from the market, and
ultimately, internal data of the company. Another common factor is the costs and benefits which
primarily reflects the expected consequence of the executed decision. The scenario below is an
example that utilizes the decision tree exhibiting a series of options on how efficiently decisions
are made.

Mr. Saavedra, a CEO Figure

and owner of XYZ Lending
1. Accept/Decline Agency
Decision Treelocated in Tagbilaran City,
Bohol. After a busy month of December, Mr. Saavedra plans to expand its financial services in the
region through establishing a new branch in a nearby town. This is to address the increasing clients
it serves as the financial sector of the country continuously progresses. Considering the current
financial condition of the agency, Mr. Saavedra prefers to rent an office space that meets all of the
aspects he prefers. To further indicate what drives the decision of Mr. Saavedra to either accept
the offer or decline it & look for another office space, see the figure 1 above.
Considering the current financial condition and cash flows of his agency, Mr. Saavedra can
only bear a monthly rent expense amounting 15,000 pesos or less. Moreover, he doesn’t consider
the number of floors relevant as long as the office space has its own bathroom and parking space.
Once it all meets his conditions, he will accept the offer by the lessor and proceed to comply with
all necessary requirements to receive the lease allowing him to constitutionally use the property
for his lending agency’s operations. Otherwise, to sellers who offered the space more than 15,000
pesos or offered it less than that but without a parking area. He will immediately decline it without
any second thoughts.
Whether Mr. Saavedra declines or accepts, every decision is derived from a series of
deliberations. Generally speaking, he declines because he thinks operating in such space isn’t
conducive and efficient for the agency’s employees, clients, and importantly, for the owner. On
the other hand, he accepts it since what is currently present is essential for a productive operation.
The example illustrated above is just a simple situation that explains the complex inference
towards decision theory. There are more beyond that and that implies that decision-making is a
critical input to an operation's success. Gathering an ample amount of information first and using
these in deliberate analysis before making the most optimal decision are vital parts in managing
operations.

Reference:
Park, M. (2023, February 20). Decision Theory - Overview, Subcategories, Types of Uncertainty.
Corporate Finance Institute. Retrieved March 3, 2023, from
https://corporatefinanceinstitute.com/resources/capital-markets/decision-theory/