Rational Decision Making

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A Case Study of “Rational Decision Making”
Ali Rashid Cheema ECON 401: Engineering Economics

Decision Making
•Decision
– Making a choice from two or more alternatives.

•The Decision-Making Process
– Identifying a problem and decision criteria and allocating weights to the criteria. – Developing, analyzing, and selecting an alternative that can resolve the problem. – Implementing the selected alternative. – Evaluating the decision’s effectiveness.

The Situation
• Hamzah is a sales manager whose sales representatives need new laptops because their old ones are outdated and inadequate for doing their job. To make it simple, assume that it is not economical to add memory to the old computers and it is the company’s policy to purchase, not lease.

The Decision-Making Process

Step 1: Identifying the Problem
• Problem
– A discrepancy between an existing and desired state of affairs.

• Characteristics of Problems
– A problem becomes a problem when a manager becomes aware of it. – There is pressure to solve the problem. – The manager must have the authority, information, or resources needed to solve the problem.

Step 2: Identifying Decision Criteria

•Decision criteria are factors that are important (relevant) to resolving the problem such as: – Costs that will be incurred (investments required) – Risks likely to be encountered (chance of failure) – Outcomes that are desired (growth of the firm)

Step 3: Allocating Weights to the Criteria

• Decision criteria are not of equal importance:
– Assigning a weight to each item places the items in the correct priority order of their importance in the decisionmaking process.

Criteria and Weights for Computer Replacement Decision

Criterion

Weight

Memory and Storage Battery life
Carrying Weight Warranty Display Quality

10 8
6 4 3

Step 4: Developing Alternatives
• Identifying viable alternatives
– Alternatives are listed (without evaluation) that can resolve the...
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