Decision Analysis - E.g.
selection of jobs from among
Decision Making
 Under conditions of certainty
 Under conditions of uncertainty
 Under conditions for risk
Decision making under Certainty
 When a manager knows the precise outcome
associated with each possible alternative or
course of action
 There is perfect knowledge about alternatives
and their consequences. Exact results are
known in advance with complete (100%)
certainty
 Managers rarely operate under conditions of
certainty, so this is not our concern in
Management Science (no need to perform
complex analysis)
Decision making under Risk
 When a single action may result in more than
one potential outcome, and the relative
probability of each outcome is known.
- E.g. Managers tries to produce product.
He determines the products will be
successful 80% and unsuccessful 20%
- He is not sure
- By past experience, research, activities
and other information
 While the alternatives are clear, the
consequence is probabilistic and doubtful.
Thus, a condition of risk may be said to exist.
 In practice, managers assess the likelihood of
various outcomes occurring based on past
experience, research and other information.
Decision making under Uncertainty
 When a single action may result in more than
one potential outcome, and the relative
probability of each outcome is unknown.
- Problems are complex or new that
decision makers have not yet established
probabilities to possible outcomes and no
comparisons to make
 Occur in cases where no historical data are
available from which to infer probabilities or
in stances which are so novel and complex
that it is impossible to make comparative
judgments.
 Decisions under conditions of uncertainty are
unquestionably the most difficult.
alternatives dealing uncertainty and for
the first time
A View of Decision-Making Conditions
Risk
Uncertainty Absolute Certainty
Probabilities Some knowledge Probabilities
and expected of probabilities and expected
outcomes are and expected outcomes are
known
unknown outcomes
Level of ambiguity and chances of making a bad decision
Low High Moderate
Decision Analysis
 Can be used to develop an optimal strategy
when a decision maker is faced with several
decision alternatives
 Uncertain or risk-filled pattern of future
events
 Even when a careful decision analysis has
been conducted, the uncertain future events
make the final consequence uncertain
 The risk associated with any decision
alternative is a direct result of the uncertainty
associated with the final consequence
 God decision analysis includes risk analysis
that provides probability information about
the favorable as well as the unfavorable
consequences that may occur
Why Use Quantitative Models?
 Decisions can certainly be made qualitatively,
but humans are prone to cognitive biases
a. Anchoring: human rely too heavily on the
first piece of information (the anchor)
- Once set, decisions are made by adjusting
around the initial anchor no matter how
irrational (anchoring and adjustment)
b. Framing: people react to a particular
choice in different ways, spending on how
it is being presented
- Example: would you rather
c. Gambler’s Fallacy: think the future
probabilities are altered by past events,
when they are independent
- Example: lose the bet 5 times in a row and
believe will win on the 6th time
Problem Formulation

 Decision problem is characterized by decision

alternatives, states of nature, and resulting
payoffs
a. Decision Alternatives – different possible
strategies the decision maker can employ
b. States of Nature – future events, not
under the control of the decision maker,
which may occur
- Example: weather conditions
 States of nature should be defined so that
they are mutually exclusive and collectively
exhaustive
a. Mutually exclusive – 2 events cannot
happen at the same time
b. Collective Exhaustive – at least 1 of the
event must occur