Decision Analyses

1 2009 John Wiley & Sons, Ltd
By Paul Goodwin &

George Wright

ISBN: 978-0-470-71439-3

2009 John Wiley &
Sons, Ltd

www.wileyeurope.com/c
ollege/goodwin
2

How people make decisions
involving
multiple objectives

2009 John Wiley & Sons, Ltd
3
Examples of decisions involving multiple
objectives
Choosing a holiday
liveliest nightlife
least crowded beaches
most sunshine
most modern hotels
lowest cost
Choosing a company to supply goods
best after-sales service
fastest delivery time
lowest prices
best reputation for reliability

4
Bounded rationality
The limitations of the human mind mean
that people use approximate methods to
deal with most decision problems
As a result they seek to identify
satisfactory, rather than optimal, courses of
action.
These approximate methods, or rules of
thumb, are often referred to as heuristics
5
Heuristics
These heuristics are often well adapted to
the structure of peoples knowledge of the
environment
Quick ways of making decisions, which
people use, especially when time is limited,
have been referred to as fast and frugal
heuristics
6
Compensatory v non
compensatory strategies
Compensatory strategy -poor performance
on some attributes is compensated by good
performance on others
- Not the case in a non-compensatory
strategy.
Compensatory strategies involve more
cognitive effort.

7

The Recognition heuristic

Used where people have to choose between
two options.
If one is recognized and the other is not, the
recognized option is chosen
Works well in environments where quality
is associated with ease of recognition
8
The Minimalist strategy
First apply recognition heuristic,
If neither option is recognized, simply guess
which is the best option.
If both options are recognized, pick at random
one of the attributes of the two options and
choose best performer on this attribute
If both perform equally well on this attribute, pick
a 2
nd
attribute at random, and so on..
9

Take the last

Same as minimalist heuristic except that people
use attribute that enabled them to choose last time
when they had a similar choice
If both options are equally good on this attribute,
choose the attribute that worked the time before,
and so on.
If none of the previously used attributes works, a
random attribute will be tried.

10

The Lexicographic strategy

Used where attributes can be ranked in order of
importance.
Involves identifying most important attribute and
selecting option which is best on that attribute
(e.g. choose cheapest option)
In theres a tie on the most important attribute,
choose the option which performs best on the 2
nd

most important attribute, and so on.
11
The semi-lexicographic strategy
like the lexicographic strategy -except if
options have similar performance on an
attribute they are considered to be tied

It can lead to violation of transitivity
axiom.
12
Example
If the price difference between brands is
less than 50 cents choose the higher quality
product, otherwise choose the cheaper
brand.
Brand Price Quality
A $3.00 Low
B $3.60 High
C $3.40 Medium
13
A is preferred to B

B is preferred to C

But:

C is preferred to A

14
Elimination by aspects (EBA)
The most important attribute is identified
and a performance cut-off point is
established.
Any alternative falling below this point is
eliminated.
The process continues with 2nd most
important attribute, and so on..
15
Example: Choosing a computer system
Aspect 1: 45m price limit
Aspect 2: Delivery time < 40 months
Aspect 3: Must have training course provided
System Price (m) Del time (mths) Course?
A 60 55 No
B 32 35 No
C 44 59 Yes
D 70 68 Yes
E 25 67 Yes
F 44 38 Yes
16
A 60 55 No
B 32 35 No
C 44 59 Yes
D 70 68 Yes
E 25 67 Yes
F 44 38 Yes
17
A 60 55 No
B 32 35 No
C 44 59 Yes
D 70 68 Yes
E 25 67 Yes
F 44 38 Yes
18
A 60 55 No
B 32 35 No
C 44 59 Yes
D 70 68 Yes
E 25 67 Yes
F 44 38 Yes
19
Strengths & Limitations of EBA
Easy to apply
Involves no complicated computations
Easy to explain and justify to others.
Fails to ensure that the alternatives retained
are superior to those which are eliminated.
- this arises because the strategy is non-
compensatory.
20

Sequential decision making:
Satisficing

Used where alternatives become available
sequentially
Search process stops when an alternative is
found which is satisfactory in that its
attributes performances all exceed
aspiration levels
These aspiration levels themselves adjust
gradually in the light of alternatives already
examined.
21
Reason-based choice
Shafir et al:

when faced with the need to choose,
decision makers often seek and construct
reasons in order to resolve the conflict and
justify their choice to themselves and to
others.
22
Some consequences of reason-based
choice
Decisions framed as choose which to
select can lead to different choices to
those framed as choose which to reject
Irrelevant alternatives can influence choice
Attributes can be rejected if they have
weakly favorable or irrelevant attributes
23
Example of reason-based choice
Candidate A Candidate B
Average written communication skills Excellent written
communication skills
Satisfactory absenteeism record Very good absenteeism
record
Average computing skills Excellent computer skills
Reasonable inter-personal skills Awkward when dealing
with others
Average level of numeracy Poor level of numeracy
Average telephone skills Poor telephone skills

24
Factors that affect how people make choices
Time available to make decision
Effort that a given strategy will involve
Decision makers knowledge about the
environment
Importance of making an accurate decision
Whether or not the choice has to be justified to
others
Desire to minimize conflict (e.g. conflicts between
the pros and cons of the alternatives).

25
Decoy effects
Space for family &
luggage
Image of
car
Sports car with
free insurance
Saloon with
free insurance
Offer elsewhere of Saloon
car without free insurance
makes this deal look
attractive
You choose the saloon!
You cant make
your mind up
26
Phantom decoys
Cost of laptop ($)
Weight of
laptop (kg)
Cheap laptop
Expensive
laptop
Offer of price discount
on cheap laptop makes
it look more attractive
-even though the offer
is no longer available
You cant make
your mind up
Price
discount
on cheap
laptop
27
Choice by unique attributes
Destination A Destination B Destination C1
Good restaurants Lots of good Lots of good
nightspots nightspots

Most people chose A
Destination A Destination B Destination C2
Good restaurants Lots of good Good restaurants
nightspots
Most people chose B
28
Emotion and choice
Sad moods prompt detailed analytic
thinking
Happy moods less detailed analysis
Affect heuristic feeling generally
positive or negative about a decision option
influence ones perceptions of the risks or
benefits it might bring

29
Justifying choices already made
People asked to rate relative
importance of aspects of
different jobs
Then asked to choose a job
The asked to re-rate relative
importance of job aspects
Revised ratings shifted to provide stronger support for the
favored job
30
Partitioning the total cost of an item changes
preferences
Cost of a television

A: $199 + $30 shipping

B $229 including shipping

Option A
appeared to be
more attractive

Decision Analyses

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1 2009 John Wiley & Sons, Ltd

By Paul Goodwin &

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