Lecture 7 - Decision Making 6th HT 7.4.2023 2023-05-27 17_23_18.pptx

Introduction to Management MGT-281 Decision Making Haris Tapakis Part-time lecturer School of Business Lecture’s topics • • • • What is a decision? How are decisions made? What are the main decision making conditions? How can quantitative methods help in the decision making process? Decisions...

Introduction to Management MGT-281 Decision Making Haris Tapakis Part-time lecturer School of Business Lecture’s topics • • • • What is a decision? How are decisions made? What are the main decision making conditions? How can quantitative methods help in the decision making process? Decisions A decision is a specific commitment to action – usually requiring a commitment of resources. Resources like: • People • € • Equipment • Time • Premises • etc Decisions Decisions are made with regard to all aspects of the management process: inputs, outputs and transformations. Decisions • Input decisions How to raise capital, who to employ etc. • Output decisions What products to make, how to distribute them etc. • Transformation decisions How to carry out a particular process, how to manage the finances etc. Relationships between decisions Types of decisions Strategic decisions (1/4): • long-term decisions on the future direction of the organisation • relate to the world outside the organisation and can require the commitment of major resources Types of decisions Strategic decisions: • long-term decisions on the future direction of the organisation • relate to the world outside the organisation and can require the commitment of major resources e.g. whether to develop a new product, acquire a competitor or enter an overseas market, a centralised warehouse/distribution, major upgrades/changes in technology used… Types of decisions Operational decisions (2/4): • shorter-term decisions often on day-to-day matters and within established policy Types of decisions Operational decisions: • shorter-term decisions often on day-to-day matters and within established policy e.g. whether to replace a machine or to offer a discount to a customer, hiring staff, etc Types of decisions Programmed decisions (3/4): • deal with familiar problems or with well structured situations • are based on established procedures or policies • often handled or supported by computers Types of decisions Programmed decisions: • deal with familiar problems or with well structured situations • are based on established procedures or policies • often handled or supported by computers e.g. when to reorder supplies or to offer a discount to a customer Types of decisions Non-programmed decisions (4/4): • deal with unstructured situations requiring a unique solution • depend on personal judgement Types of decisions Non-programmed decisions: • deal with unstructured situations requiring a unique solution • depend on personal judgement e.g. how to deal with a serious incident, such as corruption or violent behaviour, health & safety, etc Student activity Think of an important decision that you have taken sometime in your life. Then answer the following: 1. Why did you have to take a decision in this case? 2. What were your alternative options? 3. What factors did you consider when you took your decision? 4. Did you make the right decision? The decision making process An eight-step process that includes identifying a problem, selecting and implementing a solution, and evaluating its effectiveness. The decision making process Decision making conditions • Certainty: The decision maker knows exactly what will happen in the future. • Uncertainty: The decision maker doesn’t know what will happen in the future. Decision making conditions • Risk: The decision maker doesn’t know what will happen in the future but can estimate the likelihood of the alternative outcomes. Decision making conditions • Risk: The decision maker doesn’t know what will happen in the future but can estimate the likelihood of the alternative outcomes. use probabilities Decision making conditions • Ambiguity: The decision maker is uncertain about their goals and how best to achieve them. Decision making conditions Decision making using Quantitative methods • Quantitative methods can be used to select the best alternative. Decision making using Quantitative methods • Quantitative methods can be used to select the best alternative. • Normally used for programmed decisions. Decision making using Quantitative methods • Quantitative methods can be used to select the best alternative. • Normally used for programmed decisions. • Different methods are based on different criteria and produce different results. An Example Type of Condition of Market investment Good Moderate Poor A 200 100 50 B 400 -40 -90 C 550 -80 -120 An Example Type of Condition of Market investment Good Moderate Poor A 200 100 50 B 400 -40 -90 C 550 -80 -120 decision alternatives An Example Type of Condition of Market investment Good Moderate Poor A 200 100 50 B 400 -40 -90 C 550 -80 -120 states of nature An Example Type of Condition of Market investment Good Moderate Poor A 200 100 50 B 400 -40 -90 C 550 -80 -120 payoff values An Example Type of Condition of Market investment Good Moderate Poor A 200 100 50 B 400 -40 -90 C 550 -80 -120 Decision making conditions of certainty. An Example Type of Condition of Market investment Good Moderate Poor A 200 100 50 B 400 -40 -90 C 550 -80 -120 Decision making conditions of uncertainty. Laplace method Type of Condition of Market investment Good Moderate Poor Average A 200 100 50 116.67 B 400 -40 -90 90.00 C 550 -80 -120 116.67 Find the average for each investment type. Which alternative should you select? Laplace method Type of Condition of Market investment Good Moderate Poor Average A 200 100 50 116.67 B 400 -40 -90 90.00 C 550 -80 -120 116.67 Select investment A or C Decision based on risk tolerance (risk taker or risk averse). Maximax method (optimistic) Type of Condition of Market investment Good Moderate Poor Max A 200 100 50 200 B 400 -40 -90 400 C 550 -80 -120 550 Which alternative should you select? Aim/take best result in the best possible market conditions. Maximax method (optimistic) Type of Condition of Market investment Good Moderate Poor Max A 200 100 50 200 B 400 -40 -90 400 C 550 -80 -120 550 Select investment C Maximin method (pessimistic) Type of Condition of Market investment Good Moderate Poor Min A 200 100 50 50 B 400 -40 -90 -90 C 550 -80 -120 -120 Which alternative should you select? Maximin method (pessimistic) Type of Condition of Market investment Good Moderate Poor Min A 200 100 50 50 B 400 -40 -90 -90 C 550 -80 -120 -120 Select investment A Risk Tolerance! Aim for the least bad result in poor market conditions. Expected Value method Type of Condition of Market investment Good Moderate Poor A 200 100 50 B 400 -40 -90 C 550 -80 -120 prob. 0.4 0.3 0.3 Decision making conditions of risk. Expected Value method Type of Condition of Market investment Good Moderate Poor EV A 200 100 50 125 B 400 -40 -90 121 C 550 -80 -120 160 prob. 0.4 0.3 0.3 Using the weighted average for each choice. i.e. For A  (0.4X200) + (0.3 X 100) + (0.3X50) = 125 Expected Value method Type of Condition of Market investment Good Moderate Poor EV A 200 100 50 125 B 400 -40 -90 121 C 550 -80 -120 160 prob. 0.4 0.3 0.3 Which alternative should you select? Expected Value method Type of Condition of Market investment Good Moderate Poor EV A 200 100 50 125 B 400 -40 -90 121 C 550 -80 -120 160 prob. 0.4 0.3 0.3 Select investment C Decision Analysis Problem Decision alternative d1 d2 d3 d4 p 14 11 9 8 0.5 State of Nature S1 S2 S3 S4 9 10 5 10 8 7 10 10 11 10 11 13 0.2 0.2 0.1 Decision Analysis Problem Decision alternative d1 d2 d3 d4 14 11 9 8 State of Nature S1 S2 S3 S4 aver max min 9 10 5 9.5 14 5 10 8 7 9 11 7 10 10 11 10 11 9 10 11 13 10.5 13 8 Laplace method: Select alternative d4 Maximax method: Select alternative d1 Maximin method: Select alternative d3 Decision Analysis Problem Decision alternative d1 d2 d3 d4 p 14 11 9 8 0.5 State of Nature S1 S2 S3 S4 EV 9 10 5 11.3 10 8 7 9.8 10 10 11 9.6 10 11 13 9.5 0.2 0.2 0.1 Expected Value method: Select alternative d1