Quantitative Techniques in Business

Lesson 2:

Quantitative
Decision Making
 Decision making is not an easy task
for the management of a certain business
 complexity of a business
organizational structure, processes, systems, infrastructure,
tools, facilities, products, services and procedures.

 existing of several
business management and
industrial problems
Inability to refinance debt due to tight credit conditions
 What makes the
difference between good
and bad decisions?

 Good decision is one that is based on logic,

considers all available data and possible
alternatives, and applies the quantitative
approach we are about to describe
 Occasionally, a good decision results in an unexpected or
unfavorable outcome
  A bad decision is one
 that is not based on
logic, does not use all
available information,
does not consider all
alternatives,
 and does not employ
appropriate quantitative
techniques
 If you make a bad decision but are lucky and a
favorable outcome occurs, you have still made a bad
decision
Although occasionally good decisions yield bad

results, in the long run, using decision

theory will result in successful outcomes.
 The theory that has
resulted from
analyzing decision
problems in
uncertain situations
 Business decision making, and its analysis, is
of vital importance for industry management.
 Every manager has a set of objectives that are
to be achieved through the process of decision
making.
Ex:
 increase in profit
 The decision may involve short-range or long-
range consequences.
1. Clearly define the problem at hand.

 The manager should first find out what is the real

problem.
 The problem may be due to bad relations between
management and employees, decrease in sales,
increase in cost, etc.
 Managers should find out the cause and effect of the
problem.
 2. List the possible alternatives.
 State out the alternatives
available for that particular
problem/situation
 Managers should not restrict and not think
about the very obvious options
 Managers must use creative skills and come
out with alternatives that may look a little
irrelevant.
 Managers should have to do adequate
out-of-the-box ideas
research to come up with the necessary
facts that would aid in solving the problem.
3. Identify the possible outcomes
 One of the most important stages of the decision-
making procedure where managers analyze each
alternative that come up with
 Managers have to find out the

advantages and
disadvantages of each option.
 Through research done on that particular
alternative.
 At this stage, managers filter out the
options that are impossible or do not serve
the purpose.

 Rating each option with a

4. List the payoff (typically profit) of each
combination of
alternatives and outcomes
 This is the stage where
the hard work put in
analyzing would lead to a
proper decision.
 Clearly looking at the
available options and pick
the most applicable.
 Managers can also combine those alternatives to come out with a better solution
instead of just picking out any one of them
5. Select one of the mathematical decision theory
models.  Carry out the decision made

 This is a very crucial step

because all the people involved
in implementation of a solution
should know about the
implications

 This is very essential for the

decision to give successful
results.
6. Apply the model and make your decision
 Just making a decision and
implementing it, is not the end of the
decision-making procedure.
 It is crucial to monitor your decision
regularly once they are
implemented. At this stage,
managers should keep an eye on the
progress made by implementing the
solutions.
 Monitoring of solutions since early
stage may also help to alter
decisions, with noticeable deviation
of results from the expectations.
TYPE 1: DECISION MAKING UNDER
CERTAINTY
 In the environment of decision making
under certainty, decision makers know
with certainty the consequence of every
alternative or decision choice.
 Naturally, managers will choose the
alternative that will maximize their well-
being or will result in the best outcome.
TYPE 1: DECISION MAKING UNDER
CERTAINTY
 For example, let’s say that you have Php10,000
to invest for a 1-year period.
 One alternative is to open a savings account
paying 6% interest and another is to invest in a
Government Treasury bond paying 10%
interest.
 If both investments are secure and guaranteed,
there is a certainty that the Treasury bond will
TYPE 2: DECISION MAKING UNDER
UNCERTAINTY
 In decision making under uncertainty,
there are several possible outcomes for each
alternative, and the decision maker does not
know the probabilities of the various outcomes.
 Sometimes it is impossible to assess the
probability of success of a new undertaking or
product.
TYPE 3: DECISION MAKING UNDER
RISK
 In decision making under risk, there are
several possible outcomes for each alternative,
and the decision maker knows the probability of
occurrence of each outcome

 In decision making under risk, the decision

maker usually attempts to maximize his or her
expected wellbeing.
TYPE 3: DECISION MAKING UNDER
RISK
 Decision theory models for business problems
in this environment typically employ two
maximization of
equivalent criteria:
expected monetary value and
minimization of expected opportunity
loss.