ctdm: 7th semester : unit 2 decision theory

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unit: 2 Decision theory

By:Shiva Shrestha

LecturerHetauda School Of Management

Hetauda

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Definition Types of Decisions Decision Making Conditions Decision Making Process Models of Decision Making Process Decision Trees Decision Styles Decision Theories Group Decision Making Improving Decision Making

Main Contents:

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Decision is “ an act of making choices” A decision is a choice among alternative

course of action of dealing with a problem. In fact, it is a complete mental activity. Decision are the response to problem and the

results of a process of thought and deliberation.

Decision making is the act of choosing one alternative from among a set of alternatives.

Decision Theory provides an analytical and systematic approach to the study of Decision making.

DECISION THEORY

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Decision Alternatives: There is a finite number of decision alternatives available with the decision-maker at each point in time when a decision is made. The number and type of such alternatives may depend on the previous decision made and on what has happened subsequent to those decisions. These alternatives are also called courses of action[ action, acts or strategies] and are under control and known to the decision maker.

Common terminologies:

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State Of Nature: A possible future condition ( consequence or event) resulting from the choice of a decision alternatives depends upon certain factors beyond the control of the decision maker. For example: If the decision is to carry an umbrella or not, the consequence [ get wet or do not] depends on what action nature takes.

Payoff: A numerical value resulting from each possible combination of alternatives and state of nature is called payoff. The payoff values are always conditional values because of unknown state of nature.

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Frequency(programmed and non-programmed)

importance(major and minor) nature(routine and strategic) complexity(simple and complex) number of person involved(individual and

group decision)

Types of decision on the basis of:

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Certainty Risk Uncertainty

Decision making condition (environment of decision making)

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Decision making Environment

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Decision making process:

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Process of Effective Decision Making

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Classical or Rational Model Satisfying Model Implicit Favorite Model Intutive Model

Model of Decision making process

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obtain complete and perfect information eliminate uncertainty and risk evaluate everything rationally and logically

Classical or Rational Decision making

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1. Investigate the situation Define problem Diagnose causes identify decision objectives

2. Develop Alternatives seek creative alternative Do not evaluate yet

3. Evaluate Alternative and select the best one

Evaluate alternatives Select best alternatives

4. Implement and monitor Plan implementation Monitor implementation and make necessary adjustment

process of rational decision making

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Here,

Satisfying model

Expand onalternatives

Does alternativemeet satisficingCriteria?

Select firstalternative that meetscriteria and is considered“good enough”

Problemidentified

Problemsimplified

Satisficingcriteria set

Identifyalternatives

Comparealternativesone at a timeagainst criteria

YES

NO

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See here,

Implicit Favorite Model

Need for adecision isdetermined

Select an implicit favoritealternative

Identifyotheralternatives

Establishcriteria tomatch implicitfavorite

Comparealternatives withimplicit favoritecriteria

Confirmimplicitfavorite

Selectimplicitfavorite

1 2 3

4

5

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When high level of uncertainty exists When the variables are less scientifically

predictable When facts are limited When the facts do not point the way to go When analytical data are of little use

Intutive Model

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graphic form of a number of possible future events that may affect a decision.

it is one the devices for representing a diagrammatic presentation of sequential and multi-dimensional aspects of a particular decision problem for systematic analysis and evaluation is decision tree.

Decision Tree

Decision Trees … Three types of “nodes” are used:

◦ Decision nodes - represented by squares (□)◦ Chance nodes - represented by circles (Ο)◦ Terminal nodes - represented by triangles

(optional) Solving the tree involves pruning all but the

best decisions at decision nodes, and finding expected values of all possible states of nature at chance nodes

Create the tree from left to right Solve the tree from right to left

Example Decision Tree

Decision node

Chance node

Decision 1

Decision 2

Event 1Event 2

Event 3

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Diagram of decision tree

Group Decision making(GDM) GDM refers the decision which are taken by

a group of organizational members. Group can make higher quality decision

than individual. GDM is appropriate for non programmed

decision.

Advantage of GDM Generates more information ,ideas and

solutions. Generates the more alternatives . Increase the acceptance of the solution. Builds the leadership skills.

Disadvantage of GDM Require better group management skill. Create conflict between the supervisor and

subordinates. Time consuming. Unclear responsibility.

Improving decision making To improve the decision making following

guidelines can be used by manager.1. Improving individual decision making.2. Improving group decision making.

Improving Individual decision making Increase the information input. Proper communication. Select appropriate timing change the personal habit. Avoid the prejudice and biasness. Calculate the risk.

Improving the GDM Following technique are used to improve

the GDM.a. Interacting group.b. Brainstorming.c. Delphi technique .d. Nominal group techniquee. Electronic meeting

Brainstorming Involving 5 to 10 person individual generates ideas. All the generated ideas are written in the

board. No ideas can be criticized.

Nominal group technique Similar to brainstorming. It is the structure technique used to

generate the creative and innovative ideas. That idea will be accepted which holds the

highest rank.

Interacting group technique This method is traditional method. In this method all the member meet face to

face and convey their information orally or non orally.

All member provide equal opportunity to provoke their experience.

Delphi technique There is no face to face contact. Each member writes comment, suggestion

and solution of the problem. All the comment are sent to the central

location. Each member is sent the written comment

of all other member. Each member provides feedback on others

comment and forward to central location.

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Thank you !!!