Decision making

• Scientific decision making 


  Decision making based on data, using a logical and rational approach (i.e. through decision tress)
• Opportunity cost


  The cost of the next best alternative option missed by making a particular decision
• Intuition 


  Making a decision within a business based on gut feeling / trial + error

  Normally suitable for professionals among the business field
• Decision trees


  Tree like diagrams showing various options, their probabilities and financial outcomes
• Influences on decision making


  • Mission and objectives
  • Ethics (morals)
  • External environment (i.e. an expanding economy / fall in interest rates)
  • Competition
  • Resource constraints (Production capacity, skills of workforce, financial resources)
• Example of a decision tree

  Total expected value: adding together the expected value of each outcome

  Net gain: total expected value - costs

  A) Expected value

  
• Benefits of using decision trees

  • Choices are set out logically
  • Potentially options & choices are considered at the same time
  • Use of probability addresses the 'risk' of the options
  • Costs are considered as well as potential benefits
  • Easy to understand + tangible results
• Drawbacks of using decision trees

  • Probabilities are only estimates – always prone to error
  • Use of quantitative data only, ignoring qualitative aspects of decisions
  • Assignment of probabilities and expected values are prone to bias
  • Does not reduce amount of risk as a decision making technique