Decision Theory

Submitted by:Laxmi DotelBIM 7th semester

1/4/2015Decision theory

Contents

1. Model of Decision Making

2. Decision Tree

3. Decision Styles

4. Decision Theories

5. Group Decision Making

6. Improving Decision Making

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Model Of Decision Making

1. Classical model

2. Implicit favorite model

3. Intuitive model

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Decision theory

Classical model

obtain complete and perfect information

eliminate uncertainty and risk

evaluate everything rationally and logically

Decision maker follow following model

1. Investigate the situation

2. Develop Alternatives

3. Evaluate Alternative and select the best one

4. Implement and monitor

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Implicit favorite model

Deals with complex and non routine decisions.

In this approach, the manager first choose an alternative solution to the

problem and highlights its strength, and compare with other

This approach can be observed in the purchase of various favorite items in

which a customer gives arguments in favor of his choice on the basis of norms

such as price, quality, appearance, easily availability, after-sales service etc. to

reject other items of same utility

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Intuitive model

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Uses intuitive tools for decision making like experiences, ideas, feelings.

Applicable only when decision maker are have strong intuitive abilities

Decision Tree

Decision tree is a representation in graphic form of a number of possible future

events that may affect a decision.

decision tree consist of nodes, branches, probability estimates and payoffs.

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Decision

node

Chance

node

Event 1

Event 2

Event 3

Decision Styles

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Directive:

Managers using directive style have low tolerance for ambiguity and are rational in their way of thinking. They are efficient and logical. They make fast decisions with minimal information and assessing few alternatives..

Analytical:

Managers with an analytic style have high tolerance for ambiguity than do directive type and are rational in their way of thinking. They need more information and consider more alternatives. long time for decision

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Conceptual:

Managers with conceptual style have high tolerance for ambiguity and an intuitive way of thinking. They tend to be very broad to their outlook and consider many alternatives. They are at finding creative solutions to problems.

Behavioral:

Managers with behavioral style have low tolerance for ambiguity and an intuitive way of thinking. They work well with others. They are receptive to suggestions from others. Short term decision

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Decision Theories

1.Classical decision theory(economic man model):

Classical view assumes that decision making is based on rational process and

always follows the sequence of steps for decision making.

It describes how decisions should be made rather than how decisions are

actually made.

Assumptions:

-Problem is clear and unambiguous.

-All alternatives and consequences are known.

-No time or cost constraints exists.

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2.Behavioral theory(administrative Man model):• Developed By Herbert Simon•Based on administrative model i.e. how decisions are made

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• The two main component of this theory are:

i. Bounded Rationality:

Decision maker is limited in their Rationality because of different factors such

as:

Attitude

Ability

Education

Benefits

Skills

Habits

ii. Satisfying:•Decision maker become rational but within the limits of managers' ability and availability of information.• Managers make decisions based on alternatives that are satisfactory. The examples of satisfying decisions are fair price, reasonable profit, adequate market share, proper quality products etc.

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Group

Group is a collection of two or more people who work with one another

regularly to achieve common goal.

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Group Decision Making

Group decision making is process of choosing the

best alternative from the number of available

alternatives through the discussion and analysis by

the group of people.

• Advantages:• Provides more information, ideas and solutions. (Diversity of experiences

and perspectives.)

•shared responsibility

•builds team feelings

• Generates more alternatives

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Disadvantages:

Time consuming

Domination of the powerful persons

Ambiguous(unclear) responsibility

conflict

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Improving individual decision making

Some people follow rational decision making model whereas some follow non

routine model.

Individual look for solution that satisfy rather than biasness, prejudices in

decision process.

Consideration while making decision:

i. Analyze the situation

ii. Be aware of biases

iii. Don’t assume your decision style is appropriate for every job

iv. Try to enhance creativity

v. Change personal negative habits

vi. Calculate risk and return

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Improving group decision making

-Brainstorming

-Nominal Group Technique (NGT)

-Delphi Technique

- Electronic Meeting

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Brainstorming

This method uses a group of people usually from five to ten.

Ideas are generated for specific problem through group creativity.

Evaluation and ranking of ideas is not allowed in this method.

This technique is used in advertising and some other fields.

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Nominal Group Techniques

It is the structure technique used to generate the creative and innovative ideas.

That idea will be accepted which holds the highest rank.

The group meets face-to-face

Each member presents one idea to the group

Discussion and ranking is done

High ranked idea is used for decision making

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Delphi Techniques

A Delphi technique is the modification of NGT

Each individual member independently writes down comments, suggestions

and solution

All the comments are sent to a central location, where they are compiled

Finally decisions are made in written form through consensus

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Electronic Meeting

Electronic Meeting is one of the techniques that combine the NGT with

sophisticated computer technology.

up to 5o people sit around a table that is empty except for a series of computer

terminals.

The issues are presented to the participants who type their response on to their

computer screens.

The individual comments as well as aggregate votes are displayed on a

projection screen in the room.

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References

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• http://en.wikipedia.org/wiki/Decision-making

• http://www.time-management-guide.com/decision-making-skills.html

• http://www.decision-making-solutions.com/decision-making-theories.html

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