Decision Analysis

  • Purpose
    • Supporting decision making in complex, difficult and uncertain situations
  • Description
    • Examines and models the possible consequences of different decisions
    • Assists decision making under uncertainty conditions
      • Unknown factors revelant to the decision problem
        • Interrelated factor to consider
        • Conflicting perspectives of a situation
        • Diffrent options available
      • Requires an understanding of:
        • Values, goals and relevant objectives
        • Nature , consequences of the decisions and areas of uncertainty
  • Elements
    1. Outcomes
      • Requires the use of mathematical model for evaluation:
        • Financial Analysis
          • Discounted cash flow –future value on a specific date
          • Net present value – future vision for today
          • Internal rate of return – interest when VPL = 0
          • Avarage rate of return
          • Payback – Payback period
          • Cost-benefit analysis – Quantification
        • Non-financial results
          • Defects per thousand, % of available time, consumer satisfaction
          • Score on the possible results
    2. Uncertainty
      • Relevant when it’s impossible to know whin result will occur
      • Lack of information, the result depends on the response of others
      • Estimate the % of the occurrence X expected value of the results
      • Evaluate the preferred result through the tree decision when there are many uncertainties
    3. Choices
      • Relevant thwn they involve multiple conficting objectives
      • Is not sufficient to find the maximum value of a variable
        • Eliminate dominated alternatives, A < B, eliminate A
          • A = dominated / B = dominant
        • Goals ranking on a simuilar scale
          • Score proportional (0 a 100) x weight by relative importance
  • Usage Considerations
    • Advantages
      • Effective to determine the expected value of na alternative scenario for the ORG
      • Financial justification consistent across all business cases
      • Provides quantitative measures for decision makers
      • Force the evaluation of the importance placed on the alternatives
    • Disadvantages
      • Requires skill and expertise (mathematical concept of probability and similar concepts)
      • Results treated as more accurate than they really are
      • Reluctance on the review of decicions when new information comes in the areas of uncertainty that may affect the choice of best option

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