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LDR 5301, Methods of Analysis for Business Operations 1

Course Learning Outcomes for Unit V Upon completion of this unit, students should be able to:

4. Explain the major steps in decision-making. 4.1 Apply the six steps in decision-making. 4.2 Discuss the decision criteria that should be used in a given scenario. 4.3 Determine the type of decision-making environment in a given scenario.

Course/Unit

Learning Outcomes Learning Activity

4.1

Unit Lesson Chapter 3, pp. 63–73 Video: Decision Making Steps in Management Article: “The Road to Desert Storm” Unit V Assignment

4.2

Unit Lesson Chapter 3, pp. 63–73 Video: Decision Making Steps in Management Article: “Seven Types of Data Guiding COVID-19 Decision-Making As We

Move From Response to Recovery” Article: “The Road to Desert Storm” Unit V Assignment

4.3

Unit Lesson Chapter 3, pp. 63–73 Video: Decision Making Steps in Management Article: “The Road to Desert Storm” Unit V Assignment

Required Unit Resources Chapter 3: Decision Analysis, pp. 63–73 In order to access the following resources, click the links below. Gregg Learning. (2017, December 8). Decision making steps in management [Video]. Cielo24.

https://c24.page/6nf68jfagyftvwfj6p8jp5pcr9 A transcript and closed captioning are available once you access the video. Lipshitz, R. (1995, Spring). The road to Desert Storm. Organization Studies, 16(2), 243–264.

https://link.gale.com/apps/doc/A17167890/ITBC?u=oran95108&sid=ITBC&xid=581103a4 Prall, D. (2020, April 29). Seven types of data guiding COVID-19 decision-making as we move from response

to recovery. American City & Country. https://link.gale.com/apps/doc/A622309984/ITBC?u=oran95108&sid=ITBC&xid=b9b9437c

UNIT V STUDY GUIDE Decision-Making

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Unit Lesson

Introduction to Decision-Making We know from previous units that the keys to business analytics are the components and steps illustrated in Figure 1. When the four steps are complete, it is time for decision- making to take place. Sounds easy, right? It is not so because there is more to the process. The process in Figure 1 is basically how we gather data to make a decision. The data can be in the form of numbers and production in manufacturing with how many shifts to run or employees to hire. In law enforcement, the model can look at the number of calls received at 911 to determine the number of operators on duty at peak times. Recall the example of Arnold’s Mufflers from the last unit; the time slots used to set up appointments were based on the average amount of time to change a muffler. Even gambling and playing television game shows are based on data. Within the quantitative/business analytical diagram we have the ground zero or decision-making process. According to Render et al. (2018) there are six steps that can be found on page 63 of the textbook. Let’s examine the diagram in Figure 2. We have a decision to be made, which is followed up with multiple alternatives or choices. The result indicates the mathematical tools we use that produce an outcome for comparison. At this point, the outcome indicates not only final results but also the likelihood it may occur. The diagram provides a clear comparison when you look at the decision-making alternatives: Choice–Outcome (which is usually profit, loss, or higher cost, lower cost) to a final selection or outcome, which is the bottom line (end result). Also, note that this format does not always have to be a mathematical event. This could be an event regarding military operations for an attack. It could relate to a public health concern regarding a pandemic. It could be a decision process regarding a rescue operation, all of which have alternatives and impact on the result and outcome.

Figure 1: Keys of Business Analytics

Figure 2: Decision-making alternatives

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Decision-Making Environments According to Render et al. (2018), all decisions are made within environments. These environments are not dealing with weather or geographic location, but rather the environments consist of decision-making under certainty, decision-making under uncertainty, and decision-making under risk. Let’s now discuss each one of these. Decision-Making Under Certainty Consider yourself the decision-maker using the diagram in Figure 2 to map out your decision. You more than likely make decisions based on consequences that you know will happen. For example, if a heavy ice storm is taking place; your decision to not go to the local grocery store for milk is a smart decision after seeing on television that five accidents have happened on that street. Here is another example: assume you have $1,000 to invest for one year. Your choices are a high-flying biotech company in the stock market, (returns range from -30% to +30%), a savings account paying $1.20 a month, or a certificate of deposit (CD) for 1 year paying 2%. Looking at certainty, you, as the investor, see that in the first option, although it could provide a 30% return ($300), you could also lose $300 and your principle would then be $700. This is uncertainty. The other two investment vehicles have low rates of return, but your decision-making will be based on when you need the money; that is the critical element. Savings accounts have easy access and withdrawal. CDs have locked-in time periods, and early withdrawal will have a penalty that the CD owner will have to pay. Many banks charge a flat fee, for example, a percentage of the principal. Decision-making Under Uncertainty According to Render et al. (2018), there are five criteria that dictate uncertainty: optimistic, pessimistic, criterion of realism, equally likely, and minimax regret. For the purpose of our objectives, we will only cover the first four criteria for decision-making under uncertainty. Frankly, decisions under uncertainty are decisions you really want to avoid. If the environment is uncertain, then you have incomplete information to make a decision. There could be multiple solutions that produce a probability of success based on the uncertainty. Most of us are likely familiar with the first two criteria: optimistic and pessimistic. Optimistic deals with the best payoff or highest probability of success. Pessimistic refers to the worst case scenario with the best of the worst payoffs. The criterion of realism is a new term created from the old term called weighted average or average outcome. This criterion is the middle ground (hence the mean average) of all the outcomes that use a coefficient of realism x that is selected. Let’s use some information from the textbook on page 67 to illustrate this point. Assume John Thompson sets his coefficient of realism x at .80 to construct a plant. Given the data from Table 3.4, we have the following criterion of realism: Formula: Weighted average = x (best in row) + (1-x) (worst in row) Solution: $124,000 = (.8) ($200,000) + (.20) (-$180,000) The equally likely (EL) criteria assumes that all probabilities are equal. Looking at the data in table 3.5 in the textbook, we see the following: Construct a large plant $200,000 (favorable market)—180,000 (unfavorable market) = $20,000/2 = $10,000 EL Construct a small plant $100,000 (favorable market)—20,000 (unfavorable market) = $80,000/2 = $40,000 EL The benefit of the formula and computations is to make comparisons on which option is the best. In business, remaining competitive in the market is based on many factors: quality of your service or product, repeat customer business, controlling cost, expanding your market, and profit margins. When growth is a factor to gain more market share, plant expansion costs are critical. Executives want to know what the best value is for the money.

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Decision-making Under Risk Render et al. (2018) review decision-making under risk through the formula applications of expected monetary value (EMV). However, risk takes on more than just formulas. Certainly, all of us could ignore every type of psychological behavior known and just grind through a formula to determine the risk. However, there is a lot going on when making decisions under risk. Look at Figure 3. Our own personal values and preferences first come into play; they cannot just be ignored. The ground zero of decision-making is influenced by both sides of the risk scale; either we have perfect information or uncertain information. We see this all the time in Hollywood movies and TV shows dealing with war, police dramas, and investigations because things such as information and intelligence gathered drive decisions. Note also that time is usually a factor; you have one minute to evacuate 500 people from your office on the 35th floor because of a bomb threat with only one exit, the main door. Figure 3 displays all the factors that affect decision-making. Some we can control, some we cannot. As you can see, our personal values affect the immediate direction, and for each of us, our values are different. From these values, we face the challenges of internal and external influences such as time, risk, new information, certainty, and uncertainty. Factor all these in and the bullseye in the center is “What will you do?” “What is your decision?”

Now, let’s go back to the same game show example we used in Unit II with expected value (EV), only this time we are going to look at the situation from a decision-making, emotional support, certainty, and information standpoint.

Figure 3

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You are the contestant, and you have three friends and family members cheering you on and helping you make decisions. Here is where the decision-making, emotional support, uncertainty, risk, and information come into play because you must determine whether to stay in the game or quit. Is the $1million case still in play? What other values are left on the board? You obviously want to eliminate

as many of the lowest case values possible to increase the EV of the banker’s offer. Emotional support in this situation are the friends and family that help you determine if the banker’s offer is good or bad. Alternatively, if one of your friends has never had $200,000 before, he might urge you to take it and run. There could be unmet needs here with the person that we do not fully know. Some things to consider is whether they have debt, have college loans to pay off, or need the money to pay off a mortgage or buy their mom a new home. So, the question of emotions comes down to this for you, the contestant. Contestant Example: What Do You Do? Assume you have made it to the final four cases that are up on the board. You know with four cases left you have a 25% chance of having the $1million case. The case values are as follows: $25, $1,000, $250,000, and $1million. Therefore, you are still in the game! The host of the show has the banker compute the payoff at this point, which is $200,000. Having taken this course, you know to take out your calculator and determine the EMV of the expected payout offer. During the commercial break, your emotional support is giving you mixed recommendations. Once the show starts back, the audience begins to get involved with lots of mixed screaming from the audience and your emotional support team: “Take the money!” “Stay in the game!” What do you do? First, you tell the host the payoff is too low. You computed the EMV, and it should be $312,000 (see the chart below); the banker is very short. All of that aside, you have proven to the host you know your stuff, but the $200,000 payout still stands. What do you do?

Value Expected Payout $25 $25 x .25 = $6.25 $1,000 $1,000 x .25 = $250 $250,000 $200,000 x .25 = $62,500 $1,000,000 $1,000,000 x .25 = $250,000 Total = $312,756 (rounded to nearest dollar)

It is now decision time:

• Is there a right answer? Maybe. • What is your risk level?

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• How badly do you need the money? • What is your emotional situation? • What are the odds? There is a 25% chance you have the winning case and a 75% chance you do

not. Reflect on the figures in this lesson and think about emotions, certainty, uncertainty, and risk-taking. What decision would you make?

Conclusion In this unit, we looked at decision-making analyses, which included reviewing and analyzing the six steps, types, and the environments decision-making is used in (certainty, uncertainty). The lesson also brought forward the fact that decision-making is complicated when emotions become involved, and it also highlighted the amount of risk an individual is willing to take. Again, the example of Deal or No Deal was used from an emotional decision-making standpoint to emphasize what factors affect the decision, as well as how emotions and risk can affect judgment.

Reference Render, B., Stair, R. M., Jr., Hanna, M. E., & Hale, T. S. (2018). Quantitative analysis for management (13th

ed.). Pearson. https://online.vitalsource.com/#/books/9780134518558 Suggested Unit Resources In order to access the following resources, click the links below. The Chapter 3 PowerPoint Presentation will summarize and reinforce the information from this chapter in your textbook. You can also view a PDF of the Chapter 3 presentation. Learning Activities (Nongraded) Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit them. If you have questions, contact your instructor for further guidance and information. For an overview of the chapter equations, read the Key Equations on page 92 of the textbook. Then, complete questions 1–16 on the Self-Test on page 97. You can use the key in the back of the book in Appendix H to check your answers for self-tests. Complete Solved Problem 3–2 on page 94. For the solved problems, the problem is presented first, followed by its solution. Challenge yourself to apply what you have learned, and see if you can work out the problems without first looking at the solution, only using the solution to check your own work. Finally, complete Problems: 3–20 and 3–22 on page 99. You can use the answer key in Appendix G in the back of the textbook in order to check your answers