Chapter 4

DECISION MAKING
PROCESS
Learning Objectives

• Understand the conceptual of simple decision making theory –

Heuristics

• Recognize the concepts of rationality and bounded rationality, and

how they relate to decision making

• Cognitive Science, Bias , Risk & Uncertainty

• Decision Making Process – Simon Model

 Rational Decision Making

• Many decision strategies attempt to find optimal

solutions.
• In many circle, this is considered to be rational
behavior, it is not always possible to optimize.
• Rational behavior would be to choose a “good”
solution or satisficing. 
 Rational Decision Making

• The idea that in making rational decision ,rationality of

individuals is limited by the information they have.

• the cognitive limitations of their minds, and the finite

amount of time they have to make a decision, called as
Bounded rationality
heuristic
• any approach to problem solving or self-discovery that
employs a practical method that is not guaranteed to be
optimal, perfect or rational, but which is nevertheless
sufficient for reaching an immediate, short-term goal,

• Can be used to speed up the process of finding a

satisfactory solution,

• Employ trial and error, rule of thumb, guess , intuitive

judgement, common sense.
Cognitive Biases
A cognitive bias is a type of error
in thinking that occurs when
people are processing and
interpreting information in the
world around them. The human
brain is powerful but subject to
limitations. 

Cognitive biases are often a

result of your brain's attempt to
simplify information processing.
Calculate the numbers in 5 seconds
Guess & Check
Work Backwards
 Decision Making:
Treating Certainty, Uncertainty and Risk

 Certainty Models
 Assume complete knowledge
 All potential outcomes are known
 May yield optimal solution
 Uncertainty
 Several outcomes for each decision
 Probability of each outcome is unknown
 Knowledge would lead to less uncertainty
 Risk analysis (probabilistic decision making)
 Probability of each of several outcomes occurring
 Level of uncertainty => Risk (expected value)
Certainty, Uncertainty and Risk
 Decision-making under Certainty

• A condition of certainty exists when the decision-maker knows with

reasonable certainty what the alternatives are, what conditions are
associated with each alternative, and the outcome of each alternative.
• Under conditions of certainty, accurate, measurable, and reliable
information on which to base decisions is available.
Decision-making under Risk

• When a manager lacks perfect information or whenever an

information asymmetry exists, risk arises.
• The decision maker has incomplete information about available
alternatives but has a good idea of the probability of outcomes for
each alternative.
• Under a state of risk, managers must determine the probability
associated with each alternative on the basis of the available
information and his experience.
Decision Making Process
 Problem solving
A process in which one starts from an initial
state and proceeds to search through a
problem space to identify a desired goal. It
includes the 4th phase of the decision
process.

 Phases of the decision process

1. Intelligence
2. Design
3. Choice
4. Implementation
 Concepts of Decision Making

• Herbert Simon
• Winner of the 1978 Nobel Prize in
economics
• Defines three phases in the decision-
making process: intelligence, design,
and choice
• Fourth phase, implementation, can be
added
Simon Model for
Decision Making Process
Phases of the
Decision-Making Process
 Decision Making:
The Intelligence Phase

• Problem classification
The conceptualization of a problem in an attempt to place it in a
definable category, possibly leading to a standard solution
approach,
• Problem decomposition
Dividing complex problems into simpler sub-problems may
help in solving the complex problem
• Problem ownership
The jurisdiction (authority) to solve a problem
 Decision Making:
The Intelligence Phase
• Some issues that may arise during data collection
• Data are not available or overload,
• Obtaining data may be expensive,
• Data may not be accurate or precise enough
• Data may be insecure,
• Important data that influence the results may be qualitative or subjective,
• Outcomes may occur over an extended period,
• If future data is not consistent with historical data, the nature of the change has to
be predicted and included in the analysis.
• How to measure the
effective
decision ???
Decision Making:
The Design Phase

• The design phase involves finding or developing and analyzing

possible courses of action
• Understanding the problem
• Testing solutions for feasibility
• A model of the decision-making problem is constructed, tested, and
validated
 Decision Making:
The Design Phase

Developing (generating) alternatives

In optimization models the alternatives may be generated
automatically by the model
In most MSS situations it is necessary to generate alternatives
manually (a lengthy, costly process); issues such as when to stop
generating alternatives are very important
The search for alternatives usually occurs after evaluating the
alternatives are determined based on specific criteria
The outcome of every proposed alternative must be established
Decision Making:
The Design Phase

• Design is the process of designing solution outlines for the problem.

Alternative solutions are designed to solve the same problem,

• Each alternative solution is evaluated after gathering data about the

solution. The evaluation is done on the basic of criteria to identify the
positive and negative aspects of each solution,

• Quantitative tools and models are used to arrive at these solutions.

At this stage the solutions are only outlines of actual solutions and are
meant for analysis of their suitability alone,

• A lot of creativity and innovation is required to design solutions.

Decision Making:
The Design Phase

• Modeling involves conceptualizing a problem and abstracting it to

quantitative and/or qualitative form
• Models have decision variables and principle of choice.

• Decision variables
A variable in a model that can be changed and manipulated by the
decision maker. Decision variables correspond to the decisions to be made,
such as quantity to produce, amounts of resources to allocate.

• Principle of choice
The criterion for making a choice among alternatives
Decision Making:
The Design Phase

• Normative models
Models in which the chosen alternative is demonstrably the best
of all possible alternatives

• Optimization
The process of examining all the alternatives and proving that
the one selected is the best,

• Sub-optimization
An optimization-based procedure that does not consider all the
alternatives for or impacts on an organization
Decision Making:
The Design Phase

• Descriptive model
A model that describes things as.

• Simulation

• An imitation of reality

• Narrative is a story that helps a decision maker uncover the important aspects
of the situation and leads to better understanding and framing
Decision Making:
The Design Phase

• Good enough or satisficing

A process by which one seeks a solution that will satisfy a set of constraints. In
contrast to optimization, which seeks the best possible solution, satisficing simply
seeks a solution that will work well enough.

Reasons for satisficing:

• Time pressures,
• Ability to achieve optimization
• Recognition that the marginal benefit of a better
solution is not worth the marginal cost to obtain it.
Decision Making:
The Design Phase

• Measuring outcomes
• The value of an alternative is evaluated in terms of goal attainment
• Risk
• One important task of a decision maker is to attribute a level of risk to the
outcome associated with each potential alternative being considered
Decision Making:
The Design Phase

• Scenario
A statement of assumptions about the operating environment of
a particular system at a given time; a narrative description of the
decision-situation setting
• Scenarios are especially helpful in simulations and what-if
analyses
Decision Making:
The Design Phase

• Scenarios play an important role in DSS because they:

• Help identify opportunities and problem areas
• Provide flexibility in planning
• Identify the leading edges of changes that management
should monitor
• Help validate major modeling assumptions
• Allow the decision maker to explore the behavior of a system
through a model
• Help to check the sensitivity of proposed solutions to changes
in the environment
Decision Making:
The Design Phase

• Possible scenarios

• The worst possible scenario

• The best possible scenario
• The most likely scenario
• The average scenario
Decision Making:
The Design Phase

• Errors in decision making

• The model is a critical component in the decision-making
process,

• A decision maker may make a number of errors in its

development and use,

• Validating the model before it is used is critical,

• Gathering the right amount of information, with the right

level of precision and accuracy is also critical.
Decision Making:
The Choice Phase

• Solving a decision-making model involves searching for an

appropriate course of action

• Analytical techniques (solving a formula)

• Algorithms (step-by-step procedures)
• Heuristics (rules of thumb)
• Blind searches
Decision Making:
The Choice Phase

• Heuristics
Informal, judgmental knowledge of an application area that
constitutes the rules of good judgment in the field. Heuristics also
encompasses the knowledge of how to solve problems efficiently
and effectively, how to plan steps in solving a complex problem,
how to improve performance, and so forth
Decision Making:
The Choice Phase

• Analytical techniques
Methods that use mathematical formulas to derive an optimal
solution directly or to predict a certain result, mainly in
solving structured problems,

• Algorithm
A step-by-step search in which improvement is made at every
step until the best solution is found
 Decision Making:
The Choice Phase
• Sensitivity analysis

• A study of the effect of a change in one or more input variables on a

proposed solution. In many models, we need to make assumptions
we cannot test,

• Sensitivity analysis examines dependence of results on these

assumptions.
 Decision Making:
The Choice Phase
• Sensitivity analysis is a very important component of exploratory
use of models but is not always “correct”

• sensitivity analysis helps user explore implications of alternate

assumptions,

• human computer interface for sensitivity analysis is difficult to

design well
Sensitivity analysis

• Sensitivity analysis means varying the inputs to a model to see how the
results change
•
 WHAT-IF Analysis
A process that involves asking a computer what the effect of changing
some of the input data or parameters would be.

The What-If Analysis is a decision making method that helps to make the

right decision and think about what effect it will have beforehand.

• It can also prevent that no single person can make a decision, but that
a number of people are responsible for that.

• The What-If analysis is helpful for that as well.

Goal Seek
Scenario Manager

#1
Scenario Manager

#2
Example: Loan
Exercise :
Assume you own a book store and have 100 books in storage.
You sell a certain % for the highest price of $50 and a certain %
for the lower price of $20. If you sell 60% for the highest price,
calculates a possible total profit of percentage sold for high price.
Selling Chairs

#1
Selling Chairs

#2
Decision Making:
The Implementation Phase

• Generic implementation issues important in dealing with MSS

include:
• Resistance to change
• Degree of support of top management
• User training
Business Intelligence Decision Making:
The Implementation Phase
 Exercise: Buying new car
• Stage 1: Intelligence
identify the problems/opportunities and then, collect data or
information

• Stage 2: Design
analyze/develop the possible solutions for the feasibility
GO back to stage 1 if there is insufficient data.

• Stage 3: Choice
Choose one alternative
Go back to stage 1 or 2 if there are no satisfactory solutions.

• Stage 4: Implementation
Implement the selected alternative
Failure of implementation  go back to stage 1 or 2 or 3