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Decision Making- Lecture 1

Zhangxi Lin

ISQS 5340

July 2006

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GOES FOR $620,100 A chance to dine with billionaire investor Warren Buffett sold for $620,100 in an

online auction run by eBay Inc. The previous record for the seven-year-old fundraiser was $351,100.

Yongping Duan, 45, a California investor and former owner of a consumer electronics company, won the weeklong auction under the screen name ''fastisslow.'' Rocky Liang, a Taipei businessman with the screen name ''magicyourlife,'' unsuccessfully tried to outbid Duan, driving up the price by $70,000 in the three minutes before the auction closed at 10 p.m. Thursday.

Duan gets to bring seven friends to a New York steakhouse to query Buffett, the world's second-richest man, about his business strategy and investment philosophy.

The 75-year-old chairman and chief executive officer of Berkshire Hathaway Inc. of Omaha, Neb., transformed a failing textile manufacturer into a $142 billion holding company by acquiring out-of-favor securities and businesses in dozens of industries.

http://www.mcall.com/business/local/all-bizbirefs0701jul01,0,7152828.story

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Case 1: Stock trading

Google (GOOG) – price is too high to buy? Or buy some puts? Or others?

General Motor (GM) – Jim sold 100 shares at $24/share. Shall he short it or buy back the 200 shares since it is now $29/share?

http://www.harvardchina.org/SpecialEvents/02-16-2003.html http://articles.news.aol.com/business/_a/lunch-with-warren-buffett-sells-

for/20060630001009990001 http://economy.thebeijingnews.com/0714/2006/07-03/013@011821.htm http://finance.163.com/06/0704/04/2L5M9NOB00251OB6.html

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Case 2: Travel planning

I will have a business trip to LA in mid August, and will stay at CSULB for five days.

Decision Issues: Buying ticket from AA or Southwest Stopping at LV or not, depending upon which airlines

company I will purchase the ticket Renting a car or not, depending on where I will stay

and if I will stop at LV Using my frequent flyer credits or not, which is for AA

tickets only Should I go to LV one day earlier before proceeding to

LA, or go directly to LA?

(***)

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Story: Tag ,You're Late Why Wal-Mart's suppliers won't make the Jan. 1 deadline for RFID

tagging BY THOMAS WAILGUM, Nov 15, 2004 The deadline is still six weeks away. But on most days, the head of the

supply chain for one of Wal-Mart's top suppliers wishes it was two years away.

His company is one of the largest consumer goods manufacturers in the world, and by Jan. 1, 2005, he is supposed to have a system in place for attaching radio frequency identification (RFID) tags to a portion of products destined for Wal-Mart stores. But this particular IT executive already knows he isn't going to make that deadline.

Sure, he'll stick RFID tags onto just enough pallets to satisfy the folks in Wal-Mart's Bentonville, Ark., headquarters, but he's not certain those tags will even be functional upon arrival because of technical problems. And that means the efficiencies that Wal-Mart has been dreaming of achieving—the RFID-enabled transparent supply chain—may not happen anytime soon.

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Tag ,You're Late (cont’d) Mission Impossible?

Originally, Wal-Mart insisted that its top suppliers put RFID tags on all of the products shipped to specific distribution centers in Texas. Now, Wal-Mart is saying it expects its suppliers to attach tags to only 65 percent of their products (on average). However, several suppliers have told CIO that the percentage of their products tagged would be much less than 65 percent—somewhere on the order of 10 percent to 15 percent.

Suppliers claim that Wal-Mart is privately negotiating even lower shipment percentages with suppliers that say they won't be able to meet the original mandate. And several suppliers reported that those negotiated percentages are far below 65 percent.

Regardless of how Wal-Mart plays it, it's clear that many suppliers will do just enough to stay in Bentonville's good graces—and no more.

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Decision issues

Wal-Mart Should the RFID request be put off? What is the right percentage of RFID use for

suppliers? Suppliers

What is the acceptable percentage of RFID tagging?

When will this be done?

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How to improve decision making

More structure and guidance- Clemen & Reilly, p4

Taking right strategies: Acquiring experience and expertise Reducing bias in judgment Analogical reasoning Taking an outsider’s view Using linear models Understanding biases in others

- Bazerman, Chapter 12

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Recursive stages of decision making

1. Encounter decision situation in the world2. Create a preliminary statement of the decision

problem3. Gather information about the decision4. Make sense of the situation.5. Structure the decision problem6. Create a decision output7. Commit to the decision8. Evaluate and monitor the decision

(Source: http://djones.ba.ttu.edu/DecisionMaking_Stages.ppt)

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Decision-Analysis Process

Identify the decision situation and understand objectives

Identify the alternatives

Decompose and model the problem:1) Problem structure 2) Uncertainty 3) Preferences

Choose the best alternative

Sensitivity analysis

Implement the chosen alternatives

Further analysis?

No

Yes

Stage 6

Stage 7

Stage 1-5

Evaluation Stage 8

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Elements of Decision Problems

Value and objectives Making money: a special objective Value and the current decision context

Decisions to make (***) Sequential decisions Uncertain events Consequences

The time value of money

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A model of course contents (***)

IT BusinessIntelligence

Behavioral Biases

ModelsTools Methods

Data

Decision

Problems

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Information Technology, Business Intelligence and Decision Making Correct decision making is based on enough

information The advancing IT revolutionized information

collecting, processing, distributing, and utilizing.

With large amount of information, business intelligence helps extracting the knowledge from the existing data and provide more effective information processing.

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Business Intelligence

Wikipedia.org’s definition: A broad category of applications and technologies for

gathering, providing access to, and analyzing data for the purpose of helping enterprise users make better business decisions.

The term implies having a comprehensive knowledge of all of the factors that affect your business. It is imperative that you have an in depth knowledge about factors such as your customers, competitors, business partners, economic environment, and internal operations to make effective and good quality business decisions.

Business intelligence enables you to make these kinds of decisions.

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Business Intelligence

The Data Warehousing Institute’s definition: The processes, technologies, and tools

needed to turn data into information, information into knowledge, and knowledge into plans that drive profitable business action. Business intelligence encompasses data warehousing, business analytic tools, and content/knowledge management.