DECISION MAKING defined..
Decision making is an essence to problem solving. Purposeful selection from among a set of alternatives in light of a given objective. Decision-making is not a separate function of management. In fact, decision-making is intertwined with the other functions.
ORGANISATIONAL DECISION MAKING The process of responding to a problem by searching for & selecting a solution or course of action that will create value for organizational stakeholders.
The Decision Making Process
On the basis of quantum of information available:
DECISION TYPES
DECISION MAKING UNDER CERTAINTY
DECISION MAKING UNDER RISK
DECISION MAKING UNDER UNCERTAINTY
DECISION MAKING UNDER PARTIAL INFORMATION
DECISION MAKING UNDER CONFLICT
Measuring consequences of various decisions.
Pay off: When the value of a consequence is expressed directly in terms of monetary value of gain derived from that consequence, it is called a PAY OFF. Payoffs can be expressed in terms of profit, cost, time, distance or any other appropriate measure. Tabular representation of conditional outcomes to possible states of nature is called a PAY OFF MATRIX.
States of nature Strategy S1 S2 S3 S4 . . . Sj
N1
N2
N3
N4
Nk
P11 P21 P31 P41
P12 P22 P32 P42
P13 P23 P33 P43
P14 P24 P34 P44
P1K P2k P3K P4K
Pj1
Pj2
Pj3
Pj4
Pjk
Example: A carpenter is offered 5 tables for Rs. 300 (Rs. 60/- per table). Selling price per table is Rs. 150.
State of nature STRATEGY S1= Buy
N0
N1
N2
N3
N4
N5
-300
-150
150
300
450
S2= Dont buy
SAVAGE has suggested the regret or the opportunity loss as a measure to assess the consequences of a strategy. Regret : The maximum pay off minus the pay off which we have received.
EXAMPLE: If the pay off of a decision maker under the
strategy chosen with the state of nature that has occurred is Rs.500 & if an alternate strategy under this state of nature would have given him Rs.800, then his pay off is Rs.800-500= Rs.300
Choice of a decision criteria
The nature of the decision criteria would depend on the type of the decision situation. Under conditions of certainty: The largest pay off & the corresponding strategy is selected. Under conditions of risk: The strategy which gives maximum pay off is selected.
Under conditions of uncertainty: - Decision Making without Probabilities
Criteria for decision making when probability information regarding the likelihood of the states of nature is unavailable are: the optimistic approach : Maximax criteria the conservative approach: Maximin criteria the minimax regret approach Laplace Criteria
Decision Making with Probabilities- Bayesian approach
Expected Value Approach If probabilistic information regarding the states of nature is available, one may use the expected value (EV) approach. Here the expected return for each decision is calculated by summing the products of the payoff under each state of nature and the probability of the respective state of nature occurring. The decision yielding the best expected return is chosen.
Expected Value of a Decision Alternative
The expected value of a decision alternative is the sum of weighted payoffs for the decision alternative. The expected value (EV) of decision alternative di is defined as:
EV( d i ) P( s j )Vij
j 1 N
where:
N = the number of states of nature P(sj ) = the probability of state of nature sj Vij = the payoff corresponding to decision alternative di and state of nature sj
Example: Burger Prince
Burger Prince Restaurant is contemplating opening a new restaurant on Main Street. It has three different models, each with a different seating capacity. Burger Prince estimates that the average number of customers per hour will be 80, 100, or 120. The payoff table (profits) for the three models is on the next slide.
Payoff Table
Average Number of Customers Per Hour s1 = 80 s2 = 100 s3 = 120 Rs. Rs. Rs. Model A 10,000 15,000 14,000 Model B 8,000 18,000 12,000 Model C 6,000 16,000 21,000
Decision Tree
2
s1 s2 s3 s1 .4 .2 .4 .4 .2 .4 .4
Payoffs 10,000 15,000
d1 1 d2 d3
s2 s3 s1 s2 s3
14,000 8,000
18,000
12,000
6,000
.2
.4
16,000
21,000
Example: Burger Prince
Expected Value For Each Decision d1 2
EMV = .4(10,000) + .2(15,000) + .4(14,000) = Rs.12,600
Model A
Model B d2
EMV = .4(8,000) + .2(18,000) + .4(12,000) = Rs.11,600
Model C
d3
EMV = .4(6,000) + .2(16,000) + .4(21,000) = Rs.14,000
Choose the model with largest EV, Model C.
