Decision Analysis
Many real-world decision problems consist of a sequence of dependent decisions. Develop a scenario that has a
series/sequence of activities applicable to a “Decision Tree” type analysis. Explain why the scenario you selected is
applicable. Also identify and explain critical factors that should be consider. Are there any risks in your scenario?
Respond to at least two of your classmates’ postings.
In this discussion post, we are asked to develop a scenario that has a series of
activities applicable to a “Decision Tree” type of analysis while also identifying and
explaining the critical factors that should be considered.
Lately, my family and I have been contemplating the decision as to whether we are
going to buy a new truck or repair the old one. Well, our truck is almost ten years old
and has almost 140K miles. We have been trying to decide if a new truck is the best
financial decision or should we replace/repair the existing vehicle? I believe a
Decision Tree will aide us in making the best decision for our family. Decision
Analysis is a technique used in a decision-making process to persuade and support a
decision maker to make rational decisions. It is a tool which helps a decision maker to
choose the most desirable option from a variety of alternatives or courses of action in
the decision-making process (Lawrence & Pasternack, 2002). Since my family and I
are uncertain of the future of my truck, and are aware of the general probabilities
associated with keeping an older vehicle versus the expenses of a new vehicle, we
will use a Decision Tree to weigh the pros and cons, consider the risks, and factor in
the economic choices to hopefully make an educated decision and not a gut call to
own a new vehicle. Below are the things that need to be considered in the Decision
Tree.
The price of a brand new truck can be too much especially if you are just a regular
guy or leading a simple life. It will take several years before me and the family can
save up and buy the truck at its full price. There is an option to have a truck loan but
the problem here is that the monthly payments add up quick and you end up paying
much more for the vehicle. Additionally you can buy a certified pre-owned vehicle
that is lower in costs but has been driven for a few years. In either case, if you take a
loan out on either the new or pre-owned vehicle, you will be required to pay the
higher premiums of full-coverage insurance which adds to the over costs of a vehicle.
Now for the old truck, I know I have at least $2000 in repair costs to fix the
transmission and other minor problems. I can fix this myself, and not pay any labor
or I can take it to a mechanic and pay him to repair the vehicle. I either case, I can
take a personal loan to cover the costs of the repairs or I can take out of savings and
pay cash. Since the truck is paid for, I do not need to maintain full coverage on the
vehicle and operate with the liability insurance.
The third option is to continue to drive the truck until which time it turns over on its
back and throws its tires in the air and says I am done. This will initially not cost my
family anything now but may make for a crisis at some point in the future. As I am a
hands on learner, I played with the TreePlan tool provided on the disk accompanying
the textbook and made a simple Decision Tree documenting this discussion which is
attached.
Is my old truck still worthy to be driven? Yes it is, I feel if I spend a little bit of
money, the probability that it will get me another four to five years is very high. In
the mean time, I can put money away and save the interest by paying with cash when
the time comes to buy a new truck. Obviously, this decision will depend on
everyone’s own situation and the risks they wish to associate with driving an older
vehicle in relation to the tipping point where they feel it is better to just take the
plunge and drive off the dealership with a new vehicle. Another thing that has to be
considered in these times of economic struggles and a Senate and Congress who does
not seem to want to play well together is job security. I, as government contractor,
am always concerned whether my contract will be renewed. This adds risk to
obtaining a long term loan for a vehicle when I could be unemployed at the next
contract renewal point.
Ultimately, a Decision Tree is a useful tool for representing and analyzing the
decision-making process when decisions need to be made. It provides a visual
illustration of a decision problem and facilitates people to make educated decisions.
Reference
Lawrence, J., & Pasternack, B. (2002). Applied Management science: Modeling,
Spreadsheet Analysis, and Communication for Decision Making (2nd ed.) [with
accompanying CD-ROM]. Hoboken, NJ: John Wiley & Sons, Inc