DECISION ANALYSIS
Decision analysis is a systematic approach to decision making that allows managers to tackle problems where uncertainty figures as a prominent factor. A normative model is developed to represent the decision problem, facilitate logical analysis, and produce a recommended course of action. The technique is most useful in managerial situations where risk is significant. The resulting formal model is capable of generating optimal strategies for multi-stage decision problems that involve a variety of contingencies.
Proficient decision making is the hallmark of competent managers. Anyone can make bad decisions. All four of the basic managerial functions —planning, organizing, leading, and controlling— require skillful decision making. Some seasoned managers prefer to rely on experience and intuition when dealing with strategically important decisions. They argue, in essence, that executive decisions are not amenable to quantitative approaches due to the “qualitative” nature of the problems involved. Quantification, it is said, may be useful in lower-level problems where decisions can be programmed. But, goes the doctrine, executive-level decision making does not conform to “rigid math.” (Do note that quantitative is not the opposite of qualitative ; see Terms below.)
Hallowed tradition notwithstanding, the view adopted here is that the classical managerial doctrine mentioned above is at best a mythical holdover from the days when generals commanded their troops while mounted on handsome white steeds, and at worst just plain old nonsense. Modern military strategists are among the most assiduous users of systems analysis methods. Mother Nature also has something to say. The human brain comprises two hemispheres that are specialized in function: the right hemisphere is usually the “intuitive” side while the left is generally the “analytical” half. But the hemispheres always work in complementary fashion, sharing information constantly. There is no fixed organizational hierarchy insofar as the operation of the hemispheres is concerned. The brain functions as a unit, and both intellectual dimensions are continuously brought into play. The right hemisphere does not "look down" on its left counterpart; they work in unison —synergistically— always.
The position presented in this Website is that formal decision modeling contributes positively to managerial decision making by cross-checking and enhancing intuition with a logically robust model. Intuition and experience in turn contribute to the formal modeling process by providing important insights and knowledge that can then be incorporated into the models. The resulting synthesis yields better results than the individual parts by themselves. In addition, modeling produces a concrete representation of mental conceptions that is very useful for organizational communication in the implementation phase. Finally, the model itself can serve as a plan of action as well as an instrument for project control.
The page System Concepts is recommended as preliminary reading. This Decision Analysis module consists of the following sections:
- Problem Definition and Representation
- Decision Theory
- Expected Value Models
- Bayesian Modeling
- Utility Modeling
- Optional Material
- DA Exercises
Terms
Decision - (1) the act of choosing one alternative from among several options; (2) an irrevocable commitment of resources intended to accomplish a goal.
Decision Analysis – a rational approach to decision making that employs a formal model to represent alternative courses of action, potential states of nature relevant to the problem being analyzed, probability distributions of the states of nature, and expected payoffs or utilities, so as to determine an optimal decision strategy.
Descriptive model – a formal representation of a system that depicts certain aspects of the system's behavior.
Formal model – an explicit (objective) representation of a system, as opposed to a purely mental (subjective) conceptualization. Formal models can be categorized as descriptive, predictive or prescriptive (often called normative).
Normative model – a formal representation of a system that determines a recommended course of action or norm (often called prescriptive model).
Predictive model – a formal representation of a system that is capable of forecasting certain aspects of the system's behavior.
Prescriptive model – a formal representation of a system that proposes a recommended course of action for a specific entity taking into consideration that entity's particular circumstances.
Qualitative – relating to or involving distinctions based on qualities.
Quality – the essential character or nature distinguishing a thing.
Quantitative – expressible as a quantity; relating to or susceptible of measurement.
Quantity – the property of magnitude involving comparability with other magnitudes of the same category.
Illustration:
Qualitative statement – "That object is red."
Quantitative statement – "Its degree of redness is (255, 0, 51) in the HTML color coding standard."
Risk – chance of incurring a well-defined loss. (Some authors, following Frank H. Knight, use the term to mean randomness with knowable probabilities. See Wikipedia.)
Strategy – a definite, though flexible, logical construct that defines a goal and prescribes the means to accomplish it.
Uncertainty – lacking certainty of occurrence; the quality of being probabilistic in nature. (Some authors, following Frank H. Knight, use the term to mean randomness with unknowable probabilities. See Wikipedia.)
Lexicon of Decision Making
Decision Analysis
Dr. Hossein Arsham's Tools for Decision Analysis
Decision Theory Glossary
Making Better Litigation Decisions
Through Decision and Risk Analysis
