Decision Making

Lecture 2
CONTENTS
Introduction to Decision
Making
Decision Making Models
Decisions and Decision rules
Decision environment
Introduction to decision
making
A process of selecting a best
alternative out of the given
alternatives.
Types of Decision
making Models
1. The rational Economic
or Classical model
a. Representative. How
decisions ought to be made.
b. Rational
c. All the information is
available.
d. All the options are being
considered.
e. Selects optimum or best
alternative.
2. The Administrative or
Behavioral Model
Descriptive. How decisions are
actually made.
Decision makers simplify problems
and make them less complex.
Decision makers operate with
limited (bounded) rationality.
They do not possess all the
information needed.
Decision making selects a satisfying
alternative. (good enough)
Sequential. First satisfactory
alternative selected.
3. The Implicit favorite
model
Descriptive. How decisions
are actually made.
Identify an implicit favorite
before alternatives are
evaluated.
Subconscious decision making.
Decision maker is neither
rational nor objective and
unbiased.
Develops decision criteria to
make favorite appear superior.
4. The Political model
Descriptive. How decisions
are acually made.
Decision maker is neither
rational nor objective and
unbiased.
Group decision making
negotiations take place.
Negotiations involvee power
and favors.
Powerful people are swayed to
make a decision and other
follow them.
Knowledge based methodology
(KBI) in Decision making
Understand the decision
making process
Data collection
Determine experts decision
making strategies
Determine consequences of
the decision making strategies
Seeking improvements
Decision making model
Process
Input
Output
1. Input information
2. Process- decision rules
3. Output Decisions
Decisions are different from decision rules.
Ex: Out of the Banking stocks I will invest only
in those companies which have a P/E ratio
of more than or equal to 25. (HDFC Bank
and Kotak Mahindra)
Decision and Decision
Rules
Input : Available information
Process: Decision rules:
policies and protocols
specify how decision maker
processes available
information
Output: Decisions
Decisions change the state
of the system.
Decision environment
Environment is also known as
states of nature. Its a
variable.
1. Certainty: We know what to
expect. Certain environment.
2. Uncertainty: We do not
know what will happen.
3. Risk: We know the
probability of a state.
(Chance of a state
happening)
Certainty
Un certainty
Risk
Business Environment
It is uncertain.
We can estimate the
probability of a state happening.
Thus we convert a situation of
uncertainty to a situation of
risk
The probability or chance is
estimated either based on
classical approach, frequency
approach or judgmental
approach.
Chance of a state
happening
Classical approach: all states
have equal chance of
happening
Frequency approach: what
happened in the past will
happen again. Use past
frequencies to estimate future
probabilities
Judgmental approach: We take
experts assistance to get
probability values. Subjective in
nature.
In Summary
Decision making involves
choosing best alternative
There are 4 models in
decision making : rational,
Behavioral, implicit favorite
and political model
Decision rules are the basis
for decisions and they impact
the state of the system
Decision environment affects
the result of a decision.
These states can be certainty,
uncertainty or risk.
Thank you