Decision Model Theory
The Six Steps in Decision Theory * Clearly define the problem at hand. * List the possible alternatives. * Identify the possible outcomes or states of nature. * List the payoff or profit of each combination of alternatives and outcomes. * Select one of the mathematical decision theory models. * Apply the model and make your decision.
Here we use the Thompson Lumber Company case as an example to illustrate these decision theory steps. John Thompson is the founder and president of Thompson Lumber Company, a profitable firm located in Portland, Oregon.
The problem that John Thompson identifies is whether to expand his product line by manufacturing and marketing a new product, backyard storage sheds.
Step 2 * The second step is to list the alternative. * Thompson’s second step is to generate alternatives that are available to him .In decision theory the alternative is a course of action or strategy that the decision maker can choose .According to him his alternatives are to construct: 1 • a large new plant to manufacture the storage sheds 2 • a small plant, or 3 • no plant at all
* So, the decision makers should try to make all possible alternatives ,on some occasion even the least important alternative might turn out to be the best choice.
Step 3 * Third step is to identify possible outcomes. * The criteria for action are established at this time. According to Thompson there are two possible outcomes: the market for the storage sheds could be favorable means there is a high demand of the product or it could be unfavorable means that there is low demand of the product. * Optimistic decision makers tend to ignore bad outcomes; where as pessimistic managers may discount a favorable outcome. If you don’t consider all possibilities, it will be difficult to make a logical decision, and the result may be undesirable. * There may be some outcomes over