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Summary Decision Analysis for Management Judgment
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Strategic Decision Making - Summary Decision Analysis for Management Judgement
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1Chapter 1 Introduction
Complex Decisions
Decision problems have many interrelated features in general. The problem often involves:
- Multiple objectives.
- Uncertainty and the related attitude towards risk.
- A complex structure, which in part reflects the number of alternative courses of action from
which you can choose.
- Multiple stakeholders.
The Role of Decision Analysis
Decision analysis involves the decomposition of a decision problem into a set of smaller problems.
After each smaller problem has been dealt with separately, decision analysis provides a formal
mechanism for integrating the results so that a course of action can be provisionally selected (the
‘divide and conquer orientation’).
It is possible to trace back through the analysis to discover why a particular course of action was
preferred. This ability of decision analysis to provide an audit trail means that it is possible to use the
analysis to produce a defensible rationale for choosing a particular option.
Decision analysis can lead to a greater understanding of each person’s position so that there is a raised
consciousness about the issues involved and about the root of any conflict, in times of disagreement.
This enhanced communication and understanding can be particularly valuable when a group of
specialists from different fields have to meet to make a decision.
Because decision analysis allows the different stakeholders to participate in the decision process
and develop a shared perception of the problem, it is more likely that there will be a commitment to
the course of action which is eventually chosen.
Decision analysis will produce insight and promote creativity to help decision makers make better
decisions.
Good and Bad Decisions and Outcomes
We need to distinguish between good and bad decisions and good and bad outcomes.
Schilling et al. suggest three main criteria to assess decision analysis its effectiveness if it is used to
support a decision:
- The quality of the process that was used to arrive at the decision.
- Output effectiveness, which consists of both hard (e.g. profit) and softer benefits.
- Outcome effectiveness, which relates to the long-term consequences of the analysis.
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Chapter 2 How People Make Decisions Involving Multiple Objectives
Intuitive decision making is usually ‘unaided’, which means that people face decisions without the
support and structure provided by decision-analysis methods.
Decision makers have a mental toolbox of available strategies and they are adaptive in that they
choose the strategy that they think is most appropriate for a particular decision.
Bounded rationality: the fact that the limitations of the human mind mean that people have to use
‘approximate methods’ (referred to as ‘heuristics’) to deal with most decision problems and, as a
result, they seek to identify satisfactory, rather than optimal, courses of action.
Heuristics: simple strategies or mental processes that humans, animals, organizations and machines
use to quickly form judgments, make decisions, and find solutions to complex problems. This
happens when an individual focuses on the most relevant aspects of a problem or situation to
formulate a solution.
Fast and frugal heuristics: quick ways of making decision which people use, especially when time is
limited.
Heuristics Used for Decisions Involving Multiple Objectives
When a decision maker has multiple objectives, the heuristic used will either be compensatory or non-
compensatory. In a compensatory strategy an option’s poor performance on one attribute is
compensated by good performance on others.
Compensatory strategies involve more cognitive effort because the decision maker has the difficult
task of making trade-offs between improved performance on some attributes and reduced
performance on others.
The Recognition Heuristic
This heuristic is used where people have to choose between two options; if one is recognized and the
other is not, the recognized option is chosen.
- This simple heuristic is likely to work well in environments where quality is associated with
ease of recognition. However, it will not work well when ease of recognition is not associated
with how good an option is.
- Interestingly, the recognition heuristic can reward ignorance.
- This heuristic can be useful when choices have to be made on how to rank objects on some
criterion.
People are also sensitive to the usefulness of the recognition cue in different tasks. The recognition
heuristic is non-compensatory – once an alternative is recognized, no further processing of additional
cues takes place.
The Minimalist Strategy
In this heuristic the decision maker first applies the recognition heuristic, but if neither option is
recognized the person will simply guess which the best option is.
- In the event of both options being recognized then the person will pick at random one of the
attributes of the two options.
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- If this attribute enables the person to discriminate between the two options, they will make the
decision at this point. If not, then they will pick a second attribute.
Take the Last
This is the same as the minimalist heuristic except that, rather than picking a random attribute, people
recall the attribute that enabled them to reach a decision last time when they had a similar choice to
make.
The Lexicographic Strategy
In some circumstances the decision maker may be able to rank the attributes in order of importance.
In this case the decision maker can employ the lexicographic heuristic. This simply involves
identifying the most important attribute and selecting the alternative which is considered to be best on
that attribute.
- In the event of a tie on the most important attribute, the decision maker will choose the option
which performs best on the second most important attribute, and so on.
- This heuristic involves little information processing if there are few ties.
- This heuristic can work well in environments of scarce information. However, when more
information is available, the decision will be based on only a small part of the available data.
This heuristic is non-compensatory. With deeper reflection, a decision maker might have preferred
an option that performed less well on the most important attribute because of its good performance on
other attributes.
The Semi-Lexicographic Strategy
If the performance of alternatives on an attribute is similar (e.g., differences between brands is less tan
50 cents), the decision maker considers them to be tied and moves on to the next attribute.
This violates a fundamental axiom of decision analysis that is known as transitivity, which states
that if you prefer A to B and B to C, then you should also prefer A to C.
Elimination by Aspects
In this heuristic the most important attribute is identified and a cut-off point, which defines the
boundary of acceptable performance on this attribute is then established. Any alternative which has a
performance falling outside this boundary is eliminated. This process continues with the second most
important attribute and so on.
The choice process is well suited to our limited information-processing capacity. However, the
major flaw in EBA is its failure to ensure that the alternatives retained are, in fact, superior to those
which are eliminated. This arises because the strategy is non-compensatory. The decision maker’s
focus is thus on a single attribute at a time rather than possible trade-offs between attributes.
Sequential Decision Making: Satisficing
The previous alternatives have been intended to describe how people make a decision when they
are faced with a simultaneous choice between alternatives. Sometimes, however, alternatives become
available sequentially.
In satisficing, decision makers top searching as soon as they find an alternative that is satisfactory
(this may be not the best available).
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- The key aspect of satisficing is the aspiration level of the decision maker which characterizes
whether an alternative is acceptable or not.
- Another important characteristic is that decision makers’ aspiration levels may change during
the search process as they develop a better idea of what they can reasonably achieve.
- The final choice depends on the order in which the alternatives present themselves.
- Satisficing theory is most usefully applied to describe sequential choice between alternatives
that become available (and may become unavailable) as time passes.
This, again, is an example of a non-compensatory strategy.
Reason-Based Choice
This offers an alternative perspective on the way people make decisions. When faced with the need to
choose, decision makers often seek and construct reasons in order to resolve the conflict and justify
their choice to themselves and to others.
- Reason-based choice can lead to some unexpected violations of the principles of rational
decision making.
- It can make the decision maker highly sensitive to the way a decision is framed.
o Positive features are weighted more highly when selecting and negative features more
highly when rejecting.
This violates a basic principle of rational decision making – that choice should be invariant to
the way the decision is framed.
- Another principle of rational decision making is that of independence of irrelevant
alternatives (e.g., when you go to a store to buy a camera on a one-day sale for €200 and once
in the store encounter a better camera for €350, many people would now change their mind
and opt to wait in order to find out more about the available cameras, because it is difficult to
find a clear reason to justify one camera’s purchase over another).
- If an option has some features that are only weakly in its favour, or irrelevant, this can
actually deter people from selecting that option. This can be because it can be found difficult
to find reasons to justify a worthless bonus and the feeling of being exposed to criticism if the
option was chosen associated with it.
Factors Affecting Which Strategies People Employ
Many of the heuristics that we have described will tend to be applied to our choice process without
our conscious control.
Factors that affect our choices include:
- The time available to make the decision.
- The effort that a given strategy will involve.
- The decision maker’s knowledge about the environment.
- The importance of making an accurate decision.
- Whether or not the decision maker has to justify his or her choice to others.
- A desire to minimize conflict.
Effort-accuracy framework: decision makers choose their strategies to balance the effort involved in
making the decision against the accuracy that they wish to achieve.
- When a given level of accuracy is desired, they attempt to achieve this with the minimum of
effort and use one of the simpler heuristics.
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