Decision-Making Tools
Bartu Kaleagasi
Katie Olney
Decision-making
O There is an element of risk associated with
every business decision
O Main aim is to quantify as much of the risk
as possible, in order to make a rational
decision
O This can reduce risk or ensure that
unbeneficial decisions are avoided
Scientific Decision-making
Based on facts and evidence, scientific
decision-making does not include subjectivity
or emotions
Benefits:
O Based on factual evidence, easier to
communicate to staff and less risk
O Rational and logical
O Simpler to justify
Scientific Decision-making
Based on facts and evidence, scientific
decision-making does not include subjectivity
or emotions
Costs:
O Expensive and time consuming
O Does not take into account possible factors
such as irrationality, emotions or morals
Intuitive Decision-making
Based on perceptions, beliefs, instincts and
gut feelings. Usually favored by entrepreneurs
or experienced managers.
Benefits:
O Takes into account unquantifiable factors
O Requires little money and time = quicker
decision
O Considers certain issues such as social
impacts
Intuitive Decision-making
Based on perceptions, beliefs, instincts and
gut feelings. Usually favored by entrepreneurs
or experienced managers.
Costs:
O Not backed up by concrete facts or evidence
O More complicated to communicate to staff,
harder to justify
O Higher possible risk
Decision Trees
O Quantitative decision-
making tool
O Calculates probable
value for different
options a business may
face
O Helps minimize risk by
doing so
Decision Trees
Step 1: Decision
O A business
decision’s options
are represented by
a square node
O This can go into 2
or more branches
Decision Trees
Step 2: Chance
O A circle node
represents
different chances
for each given
decision
O This can also have
2 or more
outcomes in itself
Decision Trees
Step 3: Value
O The value of either
decision is
calculated
O This is done by
multiplying the
value of each
outcome by its
probability and
adding them up
Decision Trees
Example:
Here, the decision to
lease can result in
20% probability of
receiving no money,
and 80% probability
of 150,000 dollars.
Multiplied by their
coefficients, the
outcomes of this
decision add up to
120,000$.
Decision Trees
Example:
The decision to own
business can yield a
50% chance of
200,000$ and a 50%
chance of 160,000$.
Multiplied by the
coefficients of 0.5
and added up, the
value of this decision
becomes 180,000$.
Decision Trees
What can be
concluded from this,
is that the rational
scientific decision
would be to own the
business. This is due
to the fact that the
total probable value
of that decision
(180k$) is more than
that of the alternative
(120k$).
Decision Trees
O
O
O
O
Advantages of decision trees
Clear and logical layout
Considers risks of decision-making
Provides the costs of each decisions
alternative
Tangible insight to the problem
Decision Trees
Disadvantages of decision trees
O Probabilities are only estimates, and
therefore can be wrong/inaccurate
O The entire tool is based on quantifiable
factors, and therefore any other issues
such as social and moral are ignored