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4th Sem > Quantitative Techniques 2

4th Sem > Quantitative Techniques 2

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Vineet Gupta
Quantitative Techniques
1A. What is decision making? Enumerate briefly the steps in the decision making
1A: Decision Making:
A good place to start is with some standard definitions of decision-making.

1. Decision-making is the study of identifying and choosing alternatives based on the values and preferences of the decision maker. Making a decision implies that there are alternative choices to be considered, and in such a case we want not only to identify as many of these alternatives as possible but to choose the one that best fits with our goals, desires, lifestyle, values, and so on.

2. Decision-making is the process of sufficiently reducing uncertainty and doubt about alternatives to allow a reasonable choice to be made from among them. This definition stresses the information gathering function of decision-making. It should be noted here that uncertainty is reduced rather than eliminated. Very few decisions are made with absolute certainty because complete knowledge about all the alternatives is seldom possible. Thus, every decision involves a certain amount of risk.

Steps in the decision making process
D e fin e th e p o rb le m
G a th e r D a ta
Id e n tify a lte rn a tiv e s
E s ta b lis h s o lu tio n c r ite ria a n d e v a lu a te
a lte rn a tiv e s
S e le c t th e b e s t a lte rn a tiv e
Im p le m e n t th e s e le c te d a lte rn a tiv e
Step 1: Identify the decision to be made.
Page 1 of 27
Vineet Gupta
Quantitative Techniques
Recognize the warning signs that alert you to the fact that you may need to make a

decision (boredom, tension, anxiety, moodiness, frustration).
Recognize what obstacles may be present for you at this step.
Identify what strategies may be helpful to you at this step.

Step 2: Gather relevant information.
Types of information needed to make a decision: facts about self, facts about
possible alternatives, facts about significant people.
Sources of information: yourself, family, friends, informational interviewing,

libraries, written sources, etc.
Recognize that gathering information continues throughout the process.
Make use of supportive relationships.
Recognize what obstacles may be present for you at this step.
Identify what strategies may be helpful to you at this step.

Step 3: Identify alternatives
\u00b7 Expand alternatives \u2013 don\u2019t limit them! Investigate everything before making

\u00b7 Don\u2019t stereotype yourself.
\u00b7 Recognize what obstacles may be present for you at this step.
\u00b7 Identify what strategies may be helpful to you at this step.

Step 4: Weigh the evidence.

\u00b7 Consider the pros and cons of each alternative.
\u00b7 Review the goal you are trying to achieve through this decision.
\u00b7 Consider both the short and long term outcomes of each decision.
\u00b7 Test significant people\u2019s reactions to various alternatives.
\u00b7 Recognize what obstacles may be present for you at this step.

Step 5: Choose among alternatives.
\u00b7 Choosing one alternative doesn\u2019t mean you have to close off the possibility for all

others. You may be able to combine alternatives or at some time later reconsider some
of them.
\u00b7 Be aware of your emotional reaction to alternatives, as well as your analysis of \u201cthe

Step 6: Take action

\u00b7 You must take full responsibility at this point.
\u00b7 At some point, the actual decision must be made.
\u00b7 Remember \u2013 decisions are highly personal and only \u201cright\u201d or \u201cwrong\u201d for you.
\u00b7 Recognize the obstacles that may be keeping you from choosing.

1B. How does \u201cdecision making under uncertainty\u201d differ from \u201cdecision making
under risk\u201d?
1B: Decision making under risk

This category includes those decisions where the consequences of each alternative are contingent upon some probabilistic event. In other words, the various states associated with the problem (called states of nature or events) are known but occurrence of each state event is not known with certainty. That is the decision maker knows the probability of occurrence of each state, probabilities having been determined from the past historical data or market research data. In lieu of uncertainty, decision-making under stochastic situations is also called decision-making under risk.

Page 2 of 27
Vineet Gupta
Quantitative Techniques

- Forecasting the requirement of safety stock of an item.
- Determining the quantity of an insurance spare.

- Selecting a product for manufacturing among the alternatives based on market
research data.
Decision making under uncertainty

This category encompasses those decisions where even the probabilities of the different events cannot be estimated. Such a situation occurs when there is no past experience or historical data to enable computation of probabilities of the events. In absence of knowledge of the events, the decision maker has no way to compute expected payoff for strategies.

- Launching of a new product with no competitors.
- Determining optimal quantity of insurance spare in the absence of any
historical data.
Page 3 of 27

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