Basic Decision-Making Theory Quiz

Basic Decision-Making Theory

• Challenges: Risk and uncertainty, multiple conflicting objectives, complex decision structures with numerous stakeholders.

• Types of Decision-Making:

  • Intuition: Quick, experience-based decisions effective for unstructured problems but prone to biases.
  • Analytical Thinking: Systematic and data-driven but slower and resource-intensive. Effective decisions often blend these approaches.

Frame Blindness

• Definition: Mental simplifications of decision problems obscuring important details.

• Impact: Solving the wrong problem (e.g., focusing on batch sizes instead of changeover times), overlooking simple solutions, sunk cost fallacy (continuing investments in failing strategies due to past expenditures), imposing imaginary constraints.

Mitigating Frame Blindness

• Question existing frames and adapt them to evolving contexts
• Use diverse perspectives to challenge habitual biases.

Analyzing Decisions Involving Multiple Objectives

• Key Concepts: Objectives: Desired outcomes (e.g., minimizing pollution, maximizing revenue).

SMART Method (Simple Multi-Attribute Rating Technique)

• Steps:

  1. Define decision-makers and objectives.
  2. Identify alternatives and relevant attributes.
  3. Assign scores to each alternative for every attribute.
  4. Determine attribute weights (e.g., using swing weights).
  5. Calculate weighted averages for each alternative.

• Advantages: Breaks complex problems into manageable parts, provides a defensible rationale, allows "what-if" analysis, testing decision robustness.

Long-Term Decision-Making

• Challenges: High uncertainty, complex interdependencies, considering multiple potential future states.

• Approaches: Use systematic methods like scenario planning to explore plausible futures, build resilience by preparing for a range of potential outcomes.

Scenario Planning

• Definition: A structured method for exploring and preparing for multiple possible futures.

• Steps:

  1. Define the issue and time horizon.
  2. Identify current trends and uncertainties.
  3. Assess the impact of trends and uncertainties.
  4. Construct extreme world scenarios (combining positive and negative elements).
  5. Ensure scenarios are internally consistent and realistic.

• Applications: Testing strategy robustness under different scenarios, identifying new business opportunities, early contingency planning.

• Strengths: Encourages creative thinking, including minority opinions.

• Limitations: Lack of formal theoretical foundation and limited empirical evidence.

• Attributes: Measures used to assess performance against objectives.

• Value Trees: Visual tools to map objectives and attributes.

• Validation of Value Trees: Ensure completeness, operationality, decomposability, absence of redundancy, and parsimony.

• Efficient Frontier: Identifying options offering the best trade-offs between objectives.