Decision Making Conditions and Tools for Decision Making

Decision Making Conditions

The circumstances under which decisions are made vary. Managers occasionally have a near-perfect awareness of the circumstances underlying a choice, but other times they may be lacking in information. Therefore, the person making the decision must be aware of the circumstances. In general, the person making the decision must be aware of the circumstances. The decision-maker often makes choices based on certainty, risk, and ambiguity.

Certainty

Certainty is a state in which the manager is well-informed and aware of all potential options and their results. For each option, there is only one possible result. Calculating the ideal outcome is the decision-making challenge when the outcomes are known and their effects are certain. Similar to this, if there are multiple alternatives, each one is cost-analyzed before being chosen in order to maximize the utility of the available resources. The condition of certainty exists in case of routine decisions such as allocation of resources for production, payment of salaries and salary etc. Making an unwise judgment is not likely to happen very often or with much ambiguity.

Risk

Risk is a more frequent decision-making circumstance. Managers are aware of potential courses of action in such a situation, but results are tied to probability estimations. Without complete information, it is more challenging to foresee future situations, making it impossible to predict with certainty how an option would turn out. Managers can therefore predict the likely results based on their experience, research, and other information at their disposal. They can pick the option with the best chance of success. However, because no criterion for making decisions is 100% dependable, such decisions are essentially subjective. Risk-averse decision-making is accompanied by a moderate degree of ambiguity and the possibility of making an unwise choice.

Uncertainty

When managers are unaware of the issue they are facing, a situation of uncertainty results. They are unaware of all the options, the risks involved, or the expected outcomes of each option. The complexity and dynamism of modern organizations and their environs are to blame for this unpredictability. Managers cannot perform statistical analysis because they lack the knowledge necessary to determine the level of risk. When a company introduces a novel or ground-breaking product or service, adopts new technology, decides on a new advertising strategy, etc., the state of uncertainty occurs. Managers need to gather as much pertinent information as they can and approach the matter from a logical and rational standpoint in order to make good decisions under unclear circumstances. When making decisions, intuition, judgment, and experience are always important factors. However, for managers, making decisions in uncertain situations is the most unclear situation because there is more room for error.

Tools For Decision Making

The mathematical and other scientific methods for determining the best solution to a problem are known as quantitative tools. A lot of management decisions are made using numbers. These resources aid the management in problem-solving and problem-analysis. Using this technique, a model of a problem's numerous components and how they relate to one another is given. The typical quantitative tools for making decisions include the following:

Linear Programming

Using the most effective combination of limited resources and activities to accomplish goals, linear programming is a mathematical tool. With the help of this tool, linear relationships between variables are used to describe systems using mathematical equations. When a goal must be achieved while adhering to a set of restrictions, it is appropriate. It is quite helpful for maximizing revenue and reducing expenses. There may not be a linear relationship between variables because there are different methods to combine resources to get various outputs. These models aid in forecasting the future values of some variables that influence goal outcomes. In a number of circumstances where many activities compete for scarce resources, linear programming models are applied. To accomplish a goal within limits, managers must choose how to best deploy their limited resources.

Simulation

A simulation serves as a model for resolving issues in real life. This method involves putting linked variables and their interactions into a system to determine the results. In essence, computer programming is used to combine several variables to determine a set of outputs. Until the best outcome is achieved, variable combinations are changed. The usage of simulations is more beneficial in a variety of complex circumstances that are defined by a wide range of opportunities and limits. It is a descriptive technique as opposed to a viewpoint one. This method is employed by huge organizations when making resource-intensive decisions.

Payoff Matrix

A mathematical tool for making decisions is the payoff matrix. It offers a mechanism for calculating the results of different managerial options. The probability of various possibilities and their anticipated values are taken into account in the reward matrix. The probability scale goes from 0 to 1. (1). The majority of the probability used by managers are based on their own judgment, gut feeling, and previous experience. The estimated value of a different course of action is the total estimated value of all potential outcomes from that course of action multiplied by the associated probability. The decision-maker considers the expected value of each option and should choose the one with the highest expected value.

For instance, a business owner interested in spending Rs. 5,000 in a new venture discovered three potential options: a company that assembles computers, televisions, and refrigerators. Each alternative's worth is based on how the economy will evolve in the short term. He makes the decision to create a payoff matrix based on the rate of inflation. He calculates that there is an 80% chance of low inflation and a 40% chance of high inflation. Following are his estimations of the potential returns on each investment under both high and low inflation:

Three alternative firms' expected values (EV) are as follows:

Computer Assembling :EV= 0,40 (-2,50,000)+0,80(12,50,000) = Rs.9,00,000

Television Assembling :EV= 0,40 (22,50,000)+0,80 (-3,75,000) = Rs.6,00,000

Refrigerator Assembling :EV= 0,40 (7,50,000)+0,80 (6,25,000) = Rs.8,00,000

The computer assembly company has the highest expected value in the equation above, hence this company should be chosen.

Decision Tree

Managers can examine the various viable alternatives using the graphical tool known as a decision tree. Because options are assessed by computing the expected value, it is comparable to a payoff matrix. However, it is best appropriate when a series of judgments need to be taken in a succession. It enables the manager to weigh potential solutions, give them a monetary value, calculate the likelihood that a particular event will occur in each case, compare them, and select the optimal option. To use the decision tree model to solve problems, the following steps are taken.

• Create a decision tree diagram to pinpoint the issue.
• Creating the action plan, which is represented by a separate decision tree branch.
• Give each possible consequence of a line of action a probability.
• Find the monetary impact of each outcome.
• Determine each outcome's net anticipated value.

Choose the option with the highest net expected value (NEV).

Queuing Model

The cost of standing in line is analyzed using a queuing model. This model is intended to streamline the organization's wait times so that clients receive better service. When a collection of clearly specified service facilities cannot completely match client demand, a queuing problem occurs. There is a chance that waiting in lines will result in lost time, wasted work, and unnecessary costs. The basic goal of the queuing model is to strike the best possible balance between the price of providing more services and the amount of time during which customers may grow impatient and abandon the business. This method is appropriate at banks, public transportation, gas stations, hospitals, airports, theaters, and retail stores, among other places.

Game Theory

When there is competition, game theory is used. It was initially created to forecast how a company's choice will affect rivals. This narrative aims to foresee how a rival would respond to various organizational initiatives, such as pricing changes, promotions, the launch of new items, etc. Each competitor's goal in a business is to select a course of action and annoy the others in order to win. The creation of a logical method for picking a strategy is the main goal of game theory. It is used in business when there is competition because it is more challenging to predict the behavior of the rival. It creates a framework for examining choices made in competitive circumstances. It explains different phenomena in opposing circumstances. It is an extremely comprehensive and methodical model that enables the choice of logical means of achieving objectives. Due to the environment's frequent change, applying game theory to business problems is generally riskier.

Accounting Tools

Accounting instruments play significant roles in the financial decision-making process. Managers must gather, examine, and comprehend financial data and information. Before making a choice, it is critical to assess the organization's financial strengths and limitations. These financial instruments include budgeting, ratio analysis, standard costing, funds flow and cash flow analysis, and break-even analysis.

Reference

(Poudyal S.R., Pradhan G.M., and Bhandari K.P. (2011), Principles of Management. Kathmandu: Asmita Books Publishers and Distributors (P) Ltd.)