The decision making process

Wednesday 2nd of September 2009 08:58:44 AM


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What is decision making

  • Decision making is the study of identifying and choosing alternatives based on the values and preferences of the decision maker, i.e., there are alternative choices to be considered and we want not only to identify as many of these alternatives a possible but to choose the one that
    • Has the highest probability of success or effectiveness.
    • Best fits with our goals, desires, values, and so on.
  • Decision making is the study of sufficiently reducing uncertainty and doubt about alternatives to allow a reasonable choice to be made among them.
  • Decision making is a non-linear, recursive process. That is, most decisions are made by moving back and forth between the choice of criteria (the characteristics we want our choice to meet) and the identification of alternatives. The alternatives available influence the criteria we apply to them, and similarly the criteria we establish influence the alternatives we will consider.

Key points in decision making

The characteristics of the alternatives we discover will often revise the criteria we have previously identified.

Kinds of decisions

  • Decisions whether: this is the yes/no, either/or decision that must be made before we proceed with the selection of an alternative. It is important to be aware of having made a decision whether, since too often we assume that decision making begins with the identification of alternatives, assuming that the decision to choose one has already been made.
  • Decisions which: these decisions involve a choice of one or more alternatives from a set of possibilities, the choice being based on how well each alternative measures up to a set of predefined criteria.
  • Contingent decisions: these are decisions that have been made but put on hold until some condition is met (time, energy, price, availability, opportunity, and etcetera – all these factors can figure into the necessary conditions that need to be met before we can act on our decision.

The components of decision making

  • The decision environment: the collection of information, alternatives, values, and preferences available at the time of the decision. Both information and alternatives are constrained because the time and effort (i.e., manpower, money and priorities) to gain information or identify alternatives are limited.
    • The decision environment continues to expand.
    • Put off making a decision until as close as possible to the deadline – delaying a decision as long as reasonable possible provides benefits
    1. The decision environment will be larger, providing more information. There is also time for more thoughtful and extended analysis.
    2. New alternatives might be recognized or created.
    3. The decision maker’s preferences might change.
  • The effects of quantity on decision making.
    • A delay in the decision occurs because of the time required to obtain and process the extra information – this delay could impair the effectiveness of the decision or solution.
    • Information overload: so much information is available that the decision-making ability actually declines because the information in its entirety can no longer be managed or assessed appropriately. The quantity of information that can be processed by the human mind is limited. Unless information is consciously selected, processing will be biased toward the first part of the information received. After that, the mind tires and begins to ignore subsequent information or forget earlier information.
    • Selective use of information: the decision maker will choose from among all the information available only those facts which support a preconceived solution or position.
    • Mental fatigue which results in slower work or poor quality work.
    • Decision fatigue where the decision maker tires of making decisions resulting in fast, careless decisions or even decision paralysis.
  • Decision stream
    • Every decision follows from previous decisions, enables many future decisions, and prevents other future decisions.
    • Every decision you make affects the decision stream and the collections of alternatives available to you both immediately and in the future.

Concepts and definitions

  • Information: this is knowledge about the decision, the effects of its alternatives, the probability of each alternative, and so forth.
  • Alternatives: these are the possibilities one has to choose from. Alternatives can be identified (that is, searched for and located) or even developed (created where they did not previously exist). Merely searching for preexisting alternatives will result in less effective decision making.
  • Criteria: these are the characteristics or requirements that each alternative must possess to a greater or lesser extent. Usually the alternatives are rated on how well they possess each criterion.
  • Goals: what is it you want to accomplish? A component of goal identification should be included in every instance of decision analysis.
  • Value: refers to how desirable a particular outcome is, the value of the alternative, whether in dollars, satisfaction, or other benefit.
  • Preferences: these reflect the philosophy and moral hierarchy of the decision maker.
  • Decision Quality: this is a rating of whether a decision is good or bad. A good decision is a logical one based on the available information and reflecting the preferences of the decision maker. The important concept to grasp here is that the quality of a decision is not related to its outcome; a good decision can have either a good or a bad outcome. Similarly, a bad decision (one not based on adequate information or not reflecting the decision maker's preferences) can still have a good outcome. In judging the quality of a decision, in addition to the concerns of logic, use of information and alternatives, three other considerations come into play
    • The decision must meet the stated objectives most thoroughly and completely. How well does the alternative chosen meet the goals identified?
    • The decision must meet the stated objectives most efficiently, with concern over cost, energy, side effects. Are there negative consequences to the alternative that make that choice less desirable?
    • The decision must take into account valuable byproducts or indirect advantages.
  • Acceptance: those who must implement the decision or who will be affected by it must accept it both intellectually and emotionally. Acceptance is a critical factor because it occasionally conflicts with one of the quality criteria. In such cases, the best thing to do may be to choose a lesser quality solution that has greater acceptance.

Approaches to decision making

  • Authoritarian.
  • Group-based.

Planning

Planning makes decisions easier by providing guidelines and goals for the decision. Planning is a type of decision simplification technique.

Decision simplification techniques

  • Criteria filter: establish a fixed set of criteria which all alternatives must meet. Potential alternatives which fail to meet even a single criterion are excluded from the pool of alternatives.
  • Best of 3: a more accurate name for this would be "best of few" because it involves limiting the number of alternatives to three or four or five or six. This is a common technique used when the decision is under time pressure and many of the alternatives are somewhat similar.
  • Cursory exclusion: a potential alternative is rejected on the basis of a single flaw. Rather than looking at potential alternatives with a mind to choosing them, they are looked at with an eye toward rejecting them. Cursory exclusion can be suboptimal or even harmful in some situations where a really excellent choice is rejected because of some superficial flaw or atypical presentation.
  • Routinization: many decisions are made along the lines of previous decisions.
  • Satisficing: in this technique, the first satisfactory alternative is chosen rather than the best alternative. Looking for the very best would be the optimizing strategy, which is decision complicating rather than decision simplifying. Satisficing is preferred for decisions of small significance.
  • Delegation
  • Parameter delegation: this method involves delegating to others the research and development of alternatives from which the decision maker will then choose. Another example of parameter delegation is the reliance on recommendations from others. The newest term for this version of parameter delegation is collaborative filtering.
  • Conformity: in this technique you attach yourself to a preexisting decision stream and accept the decisions that most other people have made.
  • Idleness: Do nothing. Let others decide for you, or let circumstances dictate the choice. You must face the consequences of making no decision, however; making no decision is really a decision.
  • Adoption of short-range view

Advantages of planning within the context of decision making

  • Planning allows the establishment of independent goals.
  • Planning provides a standard measurement.
  • Planning converts values to action.
  • Planning allows limited resources to be committed in an orderly way.

Decision levels

  • Strategic: strategic decisions are the highest level of decision making. Here a decision concerns general direction, long term goals, philosophies and values. These decisions are the least structured and most imaginative; they are the most risky and of the most uncertain outcome, partly because they reach so far into the future and partly because they are of such importance.
  • Tactical: tactical decisions support strategic decisions. They tend to be medium range, medium significance, with moderate consequences.
  • Operational: these are every day decisions, used to support tactical decisions. They are often made with little thought and are structured. Their impact is immediate, short term, short range, and usually low cost. The consequences of a bad operational decision will be minimal, although a series of bad or sloppy operational decisions can cause harm. Operational decisions can be preprogrammed, pre-made, or set out clearly in policy manuals.

Some decision making strategies

  • Optimizing: choosing the best possible solution to the problem, discovering as many alternatives as possible and choosing the very best – dependant on
    • Importance of the problem.
    • Time available for solving it.
    • Cost involved with alternative solutions.
    • Availability of resources, knowledge.
    • Personal psychology, values.
  • Satisficing: the first satisfactory alternative is chosen rather than the best alternative (coined by combining satisfactory and sufficient) – for many small decisions, the satisficing strategy is adequate.
  • Maximax (maximize the maximums – strategy of the optimist): focuses on evaluating and then choosing the alternatives based on their maximum possible payoff; favorable outcomes and high potentials are the area of concern – when risk taking is most acceptable.
  • Maximin (maximize the minimums – strategy of the pessimist): the worst possible outcome of each decision is considered and the decision with the highest minimum is chosen – good strategy when the consequences of a failed decision are particular harmful or undesirable. Maximin concentrates on the salvage value of a decision, or of the guaranteed return of the decision.

Decision making procedure

  • Identify the decision to be made together with the goal(s) it should achieve – determine the scope and limitations of the decision.
  • Obtain the necessary information (within the limits of time imposed and your ability to process them).
  • Develop alternatives: make a list of alternatives, including the choice of doing nothing. Sometimes the decision to do nothing is useful or at least better than the alternatives, so it should always be consciously included in the decision making process. Also be sure to think about not just identifying available alternatives but creating alternatives that don’t yet exist.
  • Rate each alternative: this is the evaluation of the value of each alternative. Consider the negative of each alternative (costs, problems, time needed, and etcetera) and the positive of each (money saved, time saved, improved efficiency, etcetera).
  • Rate the risk(s) of each alternative: risks can be rated as percentages, ratios, rankings, grades or any other form that allows them to be compared.
  • Make the decision: apply your preferences and choose the path to follow, whether it includes one of the alternatives, more than one alternative (a multiple decision) or the decision to choose none.
  • Implement the decision.
  • Evaluate the decision.

Decision making techniques

  • Whether type decisions (i.e., yes/no, either/or, or two-possibility decisions)
    • T-Chart.
    • PMI.
    • Drawback-focused.
  • Which type decisions (those involving several alternatives and several criteria)
    • Measured criteria.
    • Decision matrix (weighted decision table).
    • Paired comparison analysis.
    • Decision tree analysis.

Risk

Making decisions involves a degree of risk.

Advice

  • Decide whether the risk is necessary or desirable. Spend some careful thought before acting, so that you will not end up taking unnecessary risks. 
  • Have a goal. When you take a risk, have a clear purpose in mind so that you will know, after the fact, whether you succeeded or not. What will taking the risk accomplish? 
  • Determine the possible loss as well as the gain. That is, know exactly what the consequences of failure will be. Unless you know pretty accurately what both loss and gain will be, you do not understand the risk. There is a tendency either to underestimate or to overestimate the consequences of risk. Underestimation can result in surprising damage, cost, setbacks, and pain, whatever. But overestimation is just as problematic, because it can keep us from taking the risks we should be taking. Many times, upon reflection, the worst case event of a failed risk is much less harmful or negative that we originally believed. It's a good idea in fact to list all the good expected effects of a successful outcome and all the bad expected effects of an unsuccessful outcome. 
  • Try to make an accurate estimate about the probability of each case. Is the probability of success one in two, one in ten, one in a hundred, one in a million? This can be sometimes difficult to do, but usually you can guess the probability within an order of magnitude. 
  • When possible, take one risk at a time. Divide your actions or goals wherever possible so that you are not combining risks unless absolutely necessary. Simultaneous risking increases anxiety, creates confusion, and makes failure analysis very difficult. 
  • Use scenario planning to work through the various possibilities, successes and failures, so that you will be mentally prepared for any outcome. Think about what can go right and what can go wrong and how you will respond to or adjust to each possibility. 
  • Use a plan. Set up a timetable with a list of steps to take. Use the plan as a guideline, but be flexible. 

Risk evaluation (Expected Value)

  • The traditional strategy for evaluating risks is to use an expected value calculation, based on the simple idea that the expected value of a risk is the value of the possible outcome discounted by the probability of its realization. The formula is EV = PR or expected value equals prize times risk (or chance).
  • Many risks have multiple possible outcomes, each outcome with its own probability of occurrence and its own value. The expected value of a given decision in such cases is the sum of all the values of each outcome, each diminished by its individual probability. The formula is EV = SUMN (PN X RN) where P is the probability and R is the reward or value of the risk.

Example for EV = PR risks – single possible outcome
Let's take a typical state lottery, for example. The investment for a ticket is a dollar. The usual prize is about $6,500,000 and the chance of winning is about one in 14,800,000. By discounting the possible outcome by the chance of winning (dividing $6.5 million by 14.8 million), we discover that the expected value of the lottery ticket is about 43.9 cents. Since a ticket costs $1.00 (more than twice as much as its expected value), we would conclude that this is a poor risk. Only when the expected value meets or exceeds the required expense is the risk considered worth taking.

Example of EV = SUMN (PN X RN) – multiple possible outcomes
Should I go scuba diving this weekend? If I do, there is a ninety percent probability that I will have a lot of fun. I quantify this great fun as 10 fun points. There is also a ten percent probability that I will get hurt, which I quantify as minus 20 fun points. If I make the other decision, to stay home, there is a ninety-nine percent probability that I will be bored, represented by a minus 2 fun points, and a one percent probability that something exciting will happen, which I represent as five fun points (half as exciting as going scuba diving). Our expected value worksheet looks like this:

0.90 * + 10 = +9
Yes
0.10 * – 20 = -2
Scuba?Total = 7
0.99 * – 2 = -1.98
No
0.01 * +5 = + 0.05
Total = - 1.93

Here we see that the expected value of going diving is 7, which is much higher than the expected value of staying home, which is a negative 1.93.

Risk management strategies (in order of precedence)

  • Dismiss extremely remote or unrealistic possibilities.
  • Insofar as possible, avoid catastrophes: if there is a small but significant chance for catastrophe, then the regular expected value calculations may not apply. A major principle of risk management is to avoid any real risk of catastrophe at any reasonable cost. The difficulty of applying this principle comes from the uncertainty of what is a real risk and what is a reasonable cost.
  • Recognize the trade-offs.
  • Maximize Expected Values (EVs): normally, the expected value of each alternative shows its relative preferability. That is, you are opting for the greatest probability of the greatest good.

Original source: VirtualSalt.com







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