Decision Analysis

Decision Making-Is the process of making by identifying a decision gathering information and assessing
alternative resolution. So it is a act of making a choice among available alternatives and there are
innumerable decisions taken by human beings taken by you in your day to day activities.

Decision making is a problem solving approach by choosing a specific course of action among various
alternatives. So this approach increases the chances that you will choose the most satisfying alternative
possible.

DECISION ANALYSIS - Refers to a systematic, quantitative and interactive approach to addressing and
evaluating important choices confronted by organizations in the private and public sector. Decision
Analysis can be used to develop an optimal strategy when a decision maker is faced with several
decision alternatives and an uncertain or risk-filled pattern of future events

Problem Formulation – is the first step in the decision analysis process. We begin with a verbal
statement of the problem.

a. Decision Alternative – Small complex, Medium Complex and Large complex

b. States of Nature / Chance Event – Strong Demand and Weak Demand

c. Resulting Payoff – combination of decision alternative and state of nature.

PPROACHES IN DECISION MAKING WITHOUT PROBABILITIES

1. Optimistic Approach - would be used by an optimistic decision maker. The decision with the largest
possible payoff is chosen. The decision alternative that is recommended is the one that provides the
best possible payoff. This approach is also called Maximax, or Maximum of all Maximum.

Conservative Approach – would be used by a conservative decision maker. For each decision the
minimum payoff is listed and then the decision corresponding to the maximum of these minimum
payoff is selected. Hence, the minimum possible payoff is maximized. The decision alternative
recommended is the one that provides the best of the worst possible payoff. This approach is also called
Maximin, or Maximum of all Minimum.

Laplace – Choose the alternative with the best weighted payoff. The Laplace approach treats the states
of nature as equal/ equal probability to each event. Given two events to our problem, the probability of
each event is 0.5 (50%). The best weighted payoff will be chosen.
Minimax Regret Approach – requires the construction of a regret table or an opportunity loss table.
This is done by calculating for each state of nature the difference between each payoff and the largest
payoff for that state of nature. Then, using this regret table, the maximum regret for each possible
decision is listed. The decision chosen is the one corresponding to the minimum of the maximum
regrets. This decision alternative minimizes the maximum state of regret that could occur over all
possible states of nature. This approach is called Minimax, or Minimum of all Maximum Regret.

Decision Making process

1. Identify the Decision- identify the problem that you need to solve or the question that you need to
answer. So you have to make it measurable and timely so you know for certain that you met the goals at
the end of your decision making process.

2.Gather relevant Information-So collect some pertinent information before you make your decision. So
what information is needed, the best sources of information and how to get it. This step involves both
internal and in external work.

Internal , you’ll seek it through a process of self assesment. Seeing your organization has succeeded and
failed in some areas related to your decision. Other information is external, you’ll find it in books from
other people an other sources including studies, research and evaluation from your customers, from
your suppliers, from your organization partners and through the help of marketing or management
consultant.

3.Identify the alternatives- You need to identify several possible parts or actions or alternatives. So you
can also use your imagination and additional information to construct new alternative. You will list all
possible and desirable alternative. Identify possible solutions to the problem so there is usually more
than one option to consider when trying to meet a goal or answering a problem or when making a
decision.

4.Weigh the Evidence- The raw on you information and emotions to imagine what it would be like if you
carried out each of the alternative to the end . So evaluate whether the need identified in step one
would be met or resolved through the use of edge alternative so as you go through this difficult internal
process, you begin to favor certain alternatives those that seem to have a higher potential for reaching
your goal. Finally place the alternatives in a priority order based upon your own value system. Weigh
the positive and negative things for every alternative. You need to identify potential pitfalls or downside
in every alternative. And also identify the upsides and the good things.

5.Choose among Alternative- Once you had weigh the evidence, you have to choose among he
alternatives that seems to be the best one for you. Or you may even choose a combination of
alternatives. So here’s the part of the decision making process where you will make a decision.

6.Take Action- By beginning to implement the alternative you chose in step 5. So after you make a
decision act on it. So you have to do certain actions for the particular decision. You need to develop a
plan to make the decision tangible and achievable. Develop a project plan related to that decision and
set the team loose under the test once the plan is in place.

7.Review your Decision and its Consequences- Consider the results of your action and evaluate
whether o not it has resolved the need you identified in step one. So if the decision has not met the
identified need you may want to repeat certain steps of the process to make a new decision.

For Example: You might want to make more detailed or somewhat different information or explore
additional alternatives .

So if the decision making process is a success and if did not , go back to the decision making process and
learn from your mistakes as you begin the decision making process again.

Two Types of Analysis:

Qualitative- Is based largely on the manager’s judgement and experiences and it includes the manager
intuition filled for the problem and it is more than a art than science. So the determination of none
numerical or non quantitative information and it is purely subjective characteristics and opinions. Using
subjective judgements such as management expertise, industry cycles, strength of research, focus
groups nad development and also labor relation to nanalyze a company’s values or prospects.

Quantitative- It is a technique that uses mathematical modelling, measurement of hard data and actual
numbers because it is quantitative and course numerical research to understand things. So potential
reasons for a quantitative analysis approach to decision making, the problem is very complex therefore
you need real numerical data. The problem is really important that you won’t rely on opinions, you
need data because the problem is very important, the problem is new and the problem is repetitive. So
you need to end that problem through quantitative analysis.
Decision Analysis- Refers to a systematic, quantitative and interactive approach and evaluating
important choices confronted by organizations in private and public sectors in all sectors systematic.
Systematic so we are going to use a tool quantitative numbers, numerical and interactive approach. So
in Management Science it is a tool of different methodologies necessary to address decisions in a
quantitative manners.

Ronald Howard- He is a professor and Management Scientist from Stanford university coined the term
in 1964. After with his idea that corporations make various types of decision. The decision, the supplier
decision, inventory decision, transportation decision, management decision, operation decision,
marketing decision, capital investment decisions, strategic choices, organizations make innumerable
number of decisions. Decision Analysis can be used to develop an optimal strategy. When a decision
maker is faced with several decision alternatives and an uncertain risk failed pattern of future events.
So the decision analysis always starts with problem formulation. You need to formulate the problem, it
is the first step in the decision making analysis process.

We begin in with the verbal statement of the problem.

Three very important parts of the problem formulation, the decision alternatives, states of nature and
,the resulting pay offs.

Decision alternatives are the different possible strategies that the decision maker can employ.

Ex: If you’re going to build a condominium units what are your decision alternatives? A small condo
building, a medium condo building, or a large condo building.

States of nature or unchance events Refers to the uncertain future events

Ex: If you’re going to build a condominium complex there could be a weak demand, moderate demand,

The resulting pay offs the consequences resulting from a specific combination of a decision alternative
and the state of nature or chance event or outcome.