Problem Elements in Decision Making

¶ … decision analysis have three common elements. The first one is the set of strategies or decisions available to the decision maker. The second is the set of conceivable results as well as the probabilities of such results. The third is a value model prescribing outcomes, frequently monetary values, for the numerous combinations of outcomes and decisions. After knowing such elements, an "optimal" decision can be found and made by the decision maker. An example of this would be a company.

For the sake of the example the name of the company is Orlock Inc. Now Orlock has two simply methods, which are submit a bid and do not submit a bid. In the case of Orlock submitting a bid to acquire a contract, they have to decide how much. Orlock has to not only find out how much to bid, but also how much it will cost them supply the instruments. The data the company gathers suggest to submit a bid no greater than a certain amount.

For example no more than $25,000 and no less than $18,000. Next would be to look at the behavior of the competitors and quantity of competitors. By understanding a bidding behavior, there are more chances of the company submitting a successful bid. By figuring out the value model that helps transform outcomes and decisions into monetary value, the company enters the last element of the problem. The true value model for this example would be $0 if they placed an immediate bid considering the all the information.

By listing any monetary outcomes within a payoff table, decisions become easier to manage thanks to represented visual data. Simplification of payoff tables may help in understanding the root or essence of the issue (YouTube, 2016). This is how a company can make decisions that will enable less cost and higher value. 2. Expected Monetary Value or EMV is helpful is certain scenarios. Using a personal example to explain this term, imagine someone placing a bid on a house.

There are two households wishing to place a bid on the house over asking price. The household wanting to place the bid that stays within their budget and by bidding higher than asking price, they may go well over their budget. Now if the household decides to not place a bid, there's no loss or gain. Their budget is $115,000. The asking price is $105,000. If they go into a bidding war, they could go as high as $150,000 or so the realtor says since the houses adjacent have sold for that price.

The asking price bid is the smallest competitive bid they can make. However, this bid presents as the smallest potential gain as well as loss because they gain back $10,000, but may lose the house if the bid goes higher. The choice must be made prior to the uncertainty being resolved. The most frequent method then is to calculate the EMV of every alternative, then elect the alternative that has the biggest EMV. EMV represents weighted average of probable monetary values that are weighted by their probabilities.

EMV acts as the mean of the probability distribution of any possible monetary outcomes (Cameron, Raman & Raman, 2014, p. 498). To put it simply, the EMV can be used as a long-term average. Because of this, it can be useful in many decision-making applications hence why EMV is a common method to use. Because of this, personally it would be an intuitive activity. In regards to the SUMPRODUCT function of Excel, allows to greatly simplify calculations of expected variance, standard deviation, and value.

It also greatly reduces the likelihood of errors often made by inputting incorrect formulas like for example, reduction of columns from five to two. 3. A sensitivity analysis is a method people use in order to discover how diverse values of any specific independent variable will influence a certain dependent variable all under an assumed set of expectations. It is often used in specific boundaries dependent on one or more input variables. Case in point the effect that variations in interest rates will have on the price of a bond.

Sensitivity analysis is a good technique to help predict the result of a decision if a condition deviates from the key prediction(s). If someone were to have pavers installed on their driveway, and they can afford the installation, sensitivity analysis can be used to help with certain things. For example, it can help with improvement in productivity. It can help determine the increase of productivity.