May 8, 2012
I Introduction to Decision Making
Decision making can be regarded as the mental processes (cognitive process) resulting in the selection of a course of action among several alternative scenarios. Every decision making process produces a final choice. The output can be an action or an opinion of choice.
Moreover, most complex managerial decisions are made with some uncertainty. Managers authorized substantial capital investments with less than complete knowledge about product demand. In addition, government officials make consequential decisions concerning the environment which will affect our lives for years to come, and yet knowledge about the future is not available to them. To such extent, each of these persons must make decisions under uncertain future conditions; in these and other contexts, the use of some of the probability concepts provides decision makers with a rational method for making choices.
II Step in Decision Making
Decision makers must list all the viable alternatives that must be considered in the decision. For instance,
a. Expand the present plant
b. Build a new plant
c. Subcontract out extra production to the other manufacturers
Decision makers must list the future events affecting demand that may occur. For instance,
a. High Demand (resulting from high product acceptance)
b. Moderate Demand (resulting from reasonable acceptance but heavy competitive response)
c. Low Demand (resulting from low product acceptance)
d. Failure (no product acceptance)
Decision makers now construct a payoff table
Decision maker’s alternatives
| | Expand | Build | Subcontract |
State of nature | High | 500,000 | 700,000 | 300,000 |
(demand) | Moderate | 250,000 | 300,000 | 150,000 |
| Low | -250,000 | -400,000 | -10,000 |
| Failure | -450,000 | -800,000 | |
III Different Environment in which Decisions are Made
1. Decision making under... [continues]
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