Running head: DECISION MAKING MODELS IN CURRENT BUSINESS

Decision Making Models in Current Business

Abstract
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The differences between decision making styles in businesses has varied among

businesses and years. These differences have led to a variety of potential decision-making

models such as the PrOACT method, Decision Tree model, Backward Induction, Six hat, Fuzzy

and Risk Tolerance. This study analyzes the differences and similarities among each. The goal is

to find the best decision-making model for today’s modern businesses approach.

Introduction
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Businesses and the decision-making models they employ have been used for centuries.

With the fast pace change in society today businessmen, especially managers and leaders, need

to be more in tune with an understanding of managing oneself. They must then reciprocate the

understanding onto a team of assigned individuals and co-workers. Such a feat can be a daunting

task should an individual be unaware of motivational, decision making or emotional intelligence

techniques.

Learning and understanding more about processes that can be utilized in one’s mind and

onto others is a critical investment to one’s self and future endeavors. Decision making is not

simply a psychological subject but that of a sociological one as well. Learning tools to help

transform the psychological approach of decision making to one of a sociological is what will be

evaluated in this paper.

This literature review will further discuss other decision-making models used within the

MBA 510 class as well new approaches outside the scope of the class. All approaches will be

evaluated, and a conclusion drawn for the best methodology or combination found. All

approaches are learning tools which may not “fit” one situation but may be used in another

situation, time or place. Through analyzing the various studies, there was one common

denominator. Most studies used various decision-making methods at the same time. This

literature review discusses some of the many decision-making models. The models that will be

addressed are the PrOACT method, Decision Tree model, Backward Induction, Six hat, Fuzzy

and Risk Tolerance.

Review of Literature
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PrOACT Method

The PrOACT model is a model which focuses primarily on five elements with three key

subcomponents. PrOACT stands for Problem, objectives, alternatives, consequences and

tradeoffs. The three subcomponents focus on uncertainty, risk tolerance, an tradeoffs (Hammond,

Keeney, & Raiffa, 1999, pg. 5). Problem can be defined through what the assumption, trigger

and connection between the two (Hammond, Keeney, & Raiffa, 1999, pg. 19). There can be

multiple objectives but must be narrowed down to only one main objective. The main objective

should be used to help you determine precisely what you are searching for (Hammond, Keeney,

& Raiffa, 1999, pg. 33). A, per the PrOACT model focuses on the alternatives. The alternatives

should be a long list which can be narrowed down and evaluated after all options are presented

(Hammond, Keeney, & Raiffa, 1999, pg. 55). Consequences should be accurate, precise and

complete. A consequence table can be used to help guide the user as to the best and not always

immediate answer (Hammond, Keeney, & Raiffa, 1999, pg. 66-67). Tradeoffs typically use

another table called the common swap method. This method neutralizes particular alternatives

one at a time to find the option with the overall greatest value to its user (Hammond, Keeney, &

Raiffa, 1999, pg. 91-96).

In Gupta, Dutta and Tiwair’s (2018) study on an integrated decision support system for

strategic supply chain optimization in process industries, the overall decision-making model used

was the PrOACT. The study focused on the developing a decision support system or (DSS) for

better optimizing the supply chain process (Gupta, Dutta & Tiwair, 2018). It was a review of

processes and how they can be better utilized for further studies. The objectives were clearly

stated and pertained to contribution to profit and overall changes in supplies, changing the

profitability of the company, and how the total revenue is impacted. These factors included;
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time, supply sources, materials, facilities, activities, storage areas and warehouses. The

alternatives looked at other possible paths, extending work to other industries such as the steel

industry. Consequences of the study were original participating officers were transferred off of

the project and new ones took over. The new officers did not follow the decision-making model

due to “other priorities” (Gupta, Dutta & Tiwair, 2018). Tradeoffs, if any, were not disclosed.

Other problems arose later with the melting process, limited quantities from suppliers and

the amount to which the plant requires of supply to be able to operate at a profitable capacity.

Government policies were also changed during the duration of this study. Other models used in

this decision-making process was a generalized network flow model which showed various

supply points going to the zinc manufacturing plant which then led to the warehouse. In addition,

various mathematical equations were used for risk analysis, profitability, costs, storage capacity,

inputs and outputs (Gupta, Dutta & Tiwair, 2018).

The conclusion of this study was that the DSS provided improved profits and determined

the DSS could be used at an operational and strategic level. The consensus was that the DSS

system was cost effected and yielded greater results. It was not noted but rather implied that due

to the nature of the study many bias’s or outside factors could have affected the data. The study

was not completed in a controlled environment potentially yielding misleading or skewed data.

The study showed an overall improvement of decision making and productivity through the DSS

model (Gupta, Dutta & Tiwair, 2018).

Decision Tree Model & Backward Induction

In Hotaling, J. M. (2020)’s study of decision field theory-planning, he collected data at a

University lab rather than a “on-site” study as seen in the study from Gupta, Dutta and Tiwair’s
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(2018). This dismissed any outliers and bias. 43 students from Indiana University participated in

the study. Two experiments were conducted. In experiment one, participants were asked to

choose between situation A or B, for a series of four questions. Questions asked determined a

participant’s level of risk tolerance or risk aversion as well as decision making abilities. The

results of experiment one showed that 48 percent of participants chose a risky gamble in hopes of

earning a higher reward. The risks taken by the participants had correlation to the degree to

which the stakes varied. With a higher stake, the participants were more likely to take the risk.

With a lower stake, the participants avoided the risky outcome (Hotaling, 2020).

Experiment two aimed at replicating the observed effects as experiment one. The same

questions and style of questions were used. During this experiment, 40 students were recruited.

During this trial, the results yielded 53 percent of the participants choosing the riskier option.

The end result showed that if the stakes are high, more than half of individuals will have a strong

preference to risk seeking behavior (Hotaling, 2020).

In answering the questions, the participants didn’t realize they were completing a

multistage decision-making scenario through use of a decision tree. The first decision made was

to ask for a raise or don’t ask for a raise. The decisions filtered down to get company stock or

increased wages as well as look for a new job or continue old job. Each decision was finalized

when an outcome node showed their final consequence (Hotaling, 2020).

The backward induction approach is just as it sounds. It focuses on using a decision tree

model and looking at futuristic outcomes backtracking to the original decision which needs to be

made. This looks at the value of the effects prior rather than the decision as a whole. This allows

the decision maker to analyze the decisions with the higher expected utility (EU) during all
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future decision nodes (DN). This approach is best utilized in investment, business valuation,

economic growth and taxation (Hotaling, 2020).

The idea or dynamic consistency comes into effect when using the backward induction

approach. It is the idea that failing to move forward with commitment to scaling the branch down

could jeopardize the strategy and ultimately the expected result. Going against dynamic

consistency has been seen in recent studies through multilevel decision making. Results found

that participants did not look ahead but rather the current decision at hand and passed up a high

reward to later be disappointed with a smaller reward. Regardless of the forward or backwards

way of completing a decision tree a continuation of dynamic consistency should be held in order

to prevent disappointment or unwarranted results from occurring (Hotaling, 2020).

Six Hats & Fuzzy

Kivunja (2015), discusses Edward de Bono’s famous six hat model. This enables critical

thinking using the “six hats”. Each of the six hats represents a different way of thinking. The

black hat represents caution, questioning and assessing a situation. The blue, organization, time

and problem solving. The green, creative thinking. The red, emotional attributes or intuitive

approaches. The white, data gathering and questioning the current situation at hand. Last, the

yellow hat represents the optimistic and positive view of the current situation. When used one at

a time, it allows the brain to critically think in an easy systematic way. This can be used solo or

in a group setting to boost productivity and profit. Without the use of the six-hat theory,

emotions, feeling of helplessness or confusion can blur the lines between the end goal and the

task on hand (Kivunja, 2015).

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Torkkeli et al. (2015)’s approach and study to business models closely mirrors that of the

six-hat approach which he calls, the decision-making logic. Torkkeli et al.’s study discusses how

older companies in the business world are struggling to adopt to the change of the modern

business world. It specifies that continuous innovation is the key to a business’s success and

looks at their lack of success through various angles. Through a decision-making model, one can

advance thinking beyond a causation-based logic that stale or not complacent businesses use. A

causation-based logic fails to identify variables within a business model. Positive correlations

were shown between the degree of change in a business model and the flexibility of an

organization (Torkkeli et al, 2015).

Decision making doesn’t start at the highest order of businesses it is a waterfall effect

throughout varying departments. According to Mittal et al. (2013), HR’s role in staffing

companies has been increasingly more difficult over the years. With work loads increasing, extra

time diminishing and potential for bias one Indian IT company looked for an alternative solution.

In situations where a company may be understaffed or at max capacity for workload, bringing on

an additional recruitment process could save time, money and resources. One area where the six

hat model could come into play would be deciding wither or not to use the Fuzzy multi-criteria

approach.

The fuzzy approach is a software solution to help in hiring qualified individuals for any

company. It uses similar factors to the six-hat model while eliminating human error, bias,

uncertainties and processing linguistic information. In a study of the fuzzy system, out of 236

candidates, the best candidate was selected with the least amount of expense to the Indian

company. The system can increase the number of objectives or rules to yield the perfect

candidate for the position. Fuzzy was seen to improve HR effectiveness, control the hiring
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process, improve the quality of hire and increase the speed to which the candidate was hired

(Mittal et al., (2013).

Risk Tolerance

In Tao et al, 2018’s study of risk adverse decision making, he focuses on CVaR or

conditional value at risk. CVaR is used in determining tardiness penalties, overtime,

compensation to customers and delayed delivery costs associated with supply chain and project

management. The article discusses the effect of a delay of B787 which effected Boeing company

through lost revenue, extra labor cost and loss of investors confidence. The risk tolerance was

decided when Boeing decided to provide the B787 product at a later delivery date than

anticipated rather than providing the client with a sub power product. The study focused on two

factors which affects managers risk aptitude towards due dates. One was a fixed contract and the

other is a variable. The conclusion of the study showed that to maximize the CVaR method

managers need to take a more risk-neutral approach and analyze the penalties and relationship

between cost, price and due date to ensure the product is as close to on schedule as possible (Tao

et al., 2018).

Risk tolerance is a critical component of any decision-making process. As seen in the

1986 Challenger study, one of the many factors causing the demise of the space shuttle and the

loss of lives was weather conditions and faulty O-rings. Also under political constraints for

number of flights and final due dates, the pressure to complete and launch the shuttle was

immense. Had there been more communication and a greater understanding on all levels of the

risk at hand, perhaps the lives of the astronauts and teacher would have been spared. The risk

was taken to put in the man hours to finish the project but the risk of safety for the astronauts was
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not as heavily weighted (Haunschild, 2009). While Tao et al, 2018’s study was important to a

business it is crucial to take into consideration the degree to which the decision affects others.

Conclusion

The conclusion of this literary review is there are more than one way to skin a cat. So can

be said with decision making and the utilization of various methods and tools. One method may

be better than another for any given situation. As seen in instances within this literary review,

some companies will use multiple models at a given time. What is known is that businesses need

to continue to learn new methods and tools in order to keep creativity and innovation alive.

Decision making models allow us to see beyond the box. The more people can think

creatively through decision-based tools and critical thinking the better the company’s line of

communication, productivity and overall growth will be. The statistics from the above study’s

back such ideas.

In time, we will see more studies on decision making and better practices and uses as

well as more technological advancements. There’s no denying the age of technology is upon us.

Perhaps in 50 years all decision making will be computed using algorithms which each business

has downloaded as a software or an app. As seen in the fuzzy model, tools are everchanging and

the use of a tool which can maximize profit and minimize cost through finding the perfect

candidate is unbelievable. What is known is that during this given time in the modern business

world, technology is a tool and just that.. a tool. What still remains is human interaction and the

models that our brains use as our very own tools. The more critical thinking application and

decision-making knowledge one has as an employee or manager the greater their value to their
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employer. Businesses, models and tools will change over time, so must the managers and leaders

to support a successful a team which yields a thriving business.

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References

Gupta, N., Dutta, G., &Tiwari, M., (2018.). An integrated decision for strategic supply chain
optimization in process industries: the case of a zinc company. International Journal of
Production Research , 56(17), 5866-5882,
https://doi.org/10.1080/00207543.2018.1456698

Hammond, J., Keeney, R., & Raiffa, H. (1999). Smart Choices. Harvard Business School Press.

Haunschild, P. R. (2009). Organizational Learning at NASA: The Challenger and Columbia

Accidents. Administrative Science Quarterly, 54(4), 696–698.
https://doi.org/10.2189/asqu.2009.54.4.696
Hotaling, J.M. (2020). Decision Field theory-planning: A cognitive model of planning on the fly
in multistage decision making. Decision, 7(1), 20-42. https://doi.org/10.1037/dec0000113

Kivunja, C. (2015). Using De Bono’s Six Thinking Hats Model to Teach Critical Thinking and
Problem Solving Skills for Success in the 21st Century Economy. Creative Education, 6,
380-391, https://dx.doi.org/10.4236/ce.2015.63037

Mittal, K.C., Goel, A. K, &Mohindru, P. (2013). Fuzzy Multi-Criteria Decision Making

(MCDM) in Human Resource Selection Procedure- A case study of Indian IT Industr.
BVIMR Management Edge, 6(1), 89-97. ProQuest

Tao, L., Wu D.D., Liu, S., & Dolgui, A. (2018). Optimal du date quoting for a risk -adverse
decision maker under CVaR. International Journal of Production Research, 56(5), 1934-
1959. https://doi.org/10.1080/00207543.2017.1394587

Torkkeli, L., Salojarvi, H., Sainio, L., & Saarenketo, S., (2015). Do All Roads Lead to Rome?
The Effect of the Decision-Making Logic on Business Model Change. Journal of
Entrepreneurship Management and Innovation (JEMI), 11(4), 5-24. ProQuest