17/12/2019 What Is Decision Analysis (DA)?

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Decision Analysis (DA)

By WILL KENTON | Updated Oct 10, 2019

What Is Decision Analysis (DA)?

Decision analysis (DA) is a systematic, quantitative, and visual approach to addressing and
evaluating the important choices that businesses sometimes face. Ronald A. Howard, a
professor of Management Science and Engineering at Stanford University, is credited with
originating the term in 1964. The idea is used by large and small corporations alike when
making various types of decisions, including management, operations, marketing, capital
investments, or strategic choices.

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Understanding Decision Analysis (DA)

Decision analysis uses a variety of tools to evaluate all relevant information to aid in the
decision-making process and incorporates aspects of psychology, management techniques,
training, and economics. It is often used to assess decisions that are made in the context of
multiple variables and that have many possible outcomes or objectives. The process can be
used by individuals or groups attempting to make a decision related to risk management,
capital investments, and strategic business decisions.

KEY TAKEAWAYS

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Decision analysis is a systematic, quantitative, and visual approach to making

strategic business decisions.
Decision analysis uses a variety of tools and also incorporates aspects of
psychology, management techniques, and economics.
Risk, capital investments, and strategic business decisions are areas where decision
analysis can be applied.
Decision trees and influence diagrams are visual representations that help in the
analysis process.
Critics argue that decision analysis can easily lead to analysis paralysis and, due to
information overload, the inability to make any decisions at all.

A graphical representation of alternatives and possible solutions, as well as challenges and

uncertainties, can be created on a decision tree or influence diagram. More sophisticated
computer models have also been developed to aid in the decision-analysis process.

The goal behind such tools is to provide decision-makers with alternatives when attempting
to achieve objectives for the business, while also outlining uncertainties involved and
providing measures of how well objectives will be reached if final outcomes are achieved.
Uncertainties are typically expressed as probabilities, while frictions between conflicting
objectives are viewed in terms of trade-offs and utility functions. That is, objectives are
viewed in terms of how much they are worth or, if achieved, their expected value to the
organization.

Despite the helpful nature of decision analysis, critics suggest that a major drawback to the
approach is "analysis paralysis," which is the overthinking of a situation to the point that no
decision can be made. In addition, some researchers who study the methodologies used by
decision-makers argue that this type of analysis is not often utilized.

Examples of Decision Analysis

If a real estate development company is deciding on whether or not to build a new shopping
center in a location, they might examine several pieces of input to aid in their decision-
making process. These might include traffic at the proposed location on various days of the
week at different times, the popularity of similar shopping centers in the area, financial
demographics, local competition, and preferred shopping habits of the area population. All
of these items can be put into a decision-analysis program and different simulations are run
that help the company make a decision about the shopping center.

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As another example, a company has a patent for a new product that is expected to see rapid
sales for two years before becoming obsolete. The company is confronted with a choice of
whether to sell the patent now or build the product in-house. Each option has opportunities,
risks, and trade-offs, which can be analyzed with a decision tree that considers the benefits
of selling the patent verses making the product in-house. Within those two branches of the
tree, another group of decision trees can be created to consider such things as the optimal
selling price for the patent or the costs and benefits of producing the product in-house.

Related Terms
How Risk Analysis Works
Risk analysis is the process of assessing the likelihood of an adverse event occurring within the
corporate, government, or environmental sector. more

Neuroeconomics
Neuroeconomics tries to link economics, psychology, and neuroscience to better understand
economic decision making. more

Anchoring Definition
Anchoring is the use of irrelevant information to evaluate or estimate an unknown value. more

Understanding Management by Objectives (MBO)

Management by objectives (MBO) is a management technique for setting clear goals for a specific time
period and its monitoring progress. more

How a Balanced Scorecard Is Used

A balanced scorecard is a performance metric used to identify and improve various internal functions
and their resulting external outcomes. more

Risk Management in Finance

In the financial world, risk management is the process of identification, analysis and acceptance or
mitigation of uncertainty in investment decisions. Risk management occurs anytime an investor or
fund manager analyzes and attempts to quantify the potential for losses in an investment. more

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