The Theory of Decision Making
Decision making is the analysis of a complex set of situations/predicaments, each of which has many different and possible alternatives, with each alternative having many different and possible consequences, the best of which will identify a method of action that is compatible with the basic economic and psychological needs of the decision maker.
Decision making consists of 6 steps:
•Identifying the predicament/situation
•Specifying the criteria for choosing a particular solution(colour,cost,time,size etc.)
•Creating alternatives
•Analyzing and compare alternatives
•Choosing the best alternative
•Implementing that alternative
Decisions are made in three classic environments.
Certainty: The decision maker is basing their decisions on information that they know is true and will confidently choose the alternative that has the highest payoff
Uncertainty: The decision maker does not have any reliable information on which to base their decisions or they lack the confidence the information that they do have already.
Risk: The decision maker is basing their decisions on information that is probably true as garnered from estimates from experts or reflected in historical references.
For The Record:
Probability was originally defined as “ A measure of likeliness, that an event will occur.” In contrast, the contemporary definition of probability is, “ a measure of the weight of empirical evidence, and is arrives at from inductive reasoning and statistical inference.”
Decision Making Tools
Decision Analysis was coined in 1964 by Stanford professor, Ronald Howard. It’s used by many major corporations in making huge billion dollar investment decisions. In 2010, Chevron won the Decision Analysis Society Practice Award for its own use of decision analysis.
Watch this video (http://www.youtube.com/watch?v=JRCxZA6ay3M ) featuring Chevron’s Vice Chairman George Kirkland who champions decision analysis as an integral part of how Chevron does business for one simple, and powerful reason. It works!
You should be be wary of what is called “analysis paralysis”. It's over-analyzing/thinking a situation to the point where decision is never made nor is one put into effect, ultimately paralyzing the outcome. It’s better to at least try something and then make a change if need be. A perfect solution might not always be achieved instantly, however, the fear making any decision must not block your way to a better solution.
Calculations can get very complex if there numerous values are uncertain and/or if many outcomes are linked. In spite of a couple possible short comings, research shows that the utility of decision analysis in creating decision-making algorithms are superior to that of raw intuition.
Some of the outstanding advantages of decision analysis include:
•Simple to understand and interpret.
•Valuable even with very little hard data, because insights can be generated based on experts describing a situation.
•New scenarios can be added.
•Worst, best and expected values can be determined for different scenarios
There is a raft of decision making games & software on the internet for both adults and children, for both business & personal use. Just search for
“Decision Software” or “Decision Games” etc.
1.Pairwise Comparisons (head-to-head)
In 1927 a psychometrician named L. L. Thrusting,developed The Law of Comparative Judgment. It’s a scientific approach to measuring and comparing options. Psychometrics is the measurement of an individual's
psychological attributes, including the knowledge, skills, and abilities.
It’s called Pairwise Comparisons and is a great tool to help you establish your priorities and make decisions in situations where the options are completely different, or your evaluation criteria are subjective.
You can customize the Pairwise Comparisons Method to prioritize your activities and make decisions, just as Emmanuel prioritized his activities. It’s basically a method wherein you match up all of your actuates/options head-to-head.
The simplest way to do this is with a table in an X-Y axis. List each activity/option that you want to compare in a column on the left hand side. On the Y axis, make a row of these same activities, going left to right.
Compare each activity in turn, goes head-to-head with each other. You decide which of the two options is more important A single point is awarded to the wining activity and a half a point is awarded in case of a tie.
When all comparisons are completed, you can easily rank them in order of importance by number of points they have.
For example you may be an engineer trying to out which type of material to use in the production of a a new product you’re taking to market. The engineer has determined that in order to manufacture the best possible product, he must determine which of his criteria is most important when considering the design of his product. His criteria are:
•Safety
•Aesthetics
•Cost Effective
•Practical
According to the results safety is the most important element in the design of the new product. How it looks is the least important. He can now go about allocating his resources clearly, confident that he will be successful in achieving his goal. Of course, common prevails at all times in the final decisions.
2. Decision Matrix (options vs factors)
Stuart Pugh a design engineer, who taught at the University of Strathclyde in Glasgow invented the decision matrix method. It ‘s a technique used to rank the multi-dimensional options of an option set. It’s original use was for making engineering design decisions, but is used to rank all types of options such as investment options, vendor options, product options, even decision options.
The strength of this system is that it allows you to make rational and confident decisions, while taking many different factors such as time,service levels,technology etc. into account.
Basically, a decision matrix is a scoring system for a set of options which can then be ranked according to their individual scores. It is not weighted to allow for a quick selection process.
On the other hand, a weighted decision matrix weights the criteria in order of importance. These scores better reflect the importance to the decision maker of the criteria involved, therefore the more important the criteria the higher the weighting it is given. Each of the options are scored and multiplied by the weighting factor given to each of the criteria.
The advantage of the decision making matrix is that subjective opinions about one alternative versus another can be made more objective. Another advantage of this method is that sensitivity studies can be performed. An example of this might be to see how much your opinion would have to change in order for a lower ranked alternative to out rank a competing alternative.
How To Use The Decision Matrix Tool
Identify your criteria/factors.For example, you’re looking for a new car
with certain criteria/factors such as:
•Reliability
•Financing
•Electric Power
•Cost 25K or less
•Gas consumption 50 kpg or better
•Safety
Next,score each option in its’ importance to each of factors/criteria.
Use a simple scheme from 0-3. A score of 0 means it’s not that important. A score of 3, indicates high priority. You can create your own values here.
Now assign the relative weight of importance that each factor has on your decision. Again use numbers from 0-3, or make your own values. A weight of 0 means that the factor is has little or no influence on your decision and a weight of 5 means that it’s very influential to your decision. If you difficulty in determining the relative weighting or ranking of the criteria, simply use the
Finally, multiply each of the scores from step 2 above, by the values for the weighted importance of the factor that was calculated in step 3. This gives you the weighted score for each option-factor combination.
Toyota comes in as the hands down winner,but, the Kia might be your final decision, because although it’s almost the same score as the Toyota, it has much better fuel consumption score than the equally priced Ford. So in reality price & fuel consumption were more important to you, than you originally thought.
3.Decision tree
A Decision Tree is an abstraction and simplification of the real problem. It allows you to visually lay out all of your possible options and asses the risks and rewards associated with the outcome of each option, thereby helping you to form a course of action. There must also be a finite set of outcomes for each option, and one decision criterion can be considered at a time.
Let’s say you’re making plans for your next vacation, and you’re considering things such as: airline, cost, climate, language, safety, hotels, season, ground transportation,food, meeting local people, etc.
Start by brainstorming a list of all of the variables involved in your decision making problem, then prioritize them.
You’ve decided that ”meeting local people” is the most important option of your vacation, and you want to determine the most effective way, yet economical way to do it.
See figure 2F for a possible solution
So you end up deciding to rent a car with a bike carrier for your rented bike. This allows you to travel quickly and safely from city to city where you can explore by bicycle on your own. Furthermore you decide not to hire a tour guide and spend the $280 you would save by not taking a bus tour,(600-55-265=280) on taxi fares. The taxi drivers always know the best places to go...just ask them. Best of all their advice is free. You now benefit from the best of all three options in a most economical manner.
Decision making is the analysis of a complex set of situations/predicaments, each of which has many different and possible alternatives, with each alternative having many different and possible consequences, the best of which will identify a method of action that is compatible with the basic economic and psychological needs of the decision maker.
Decision making consists of 6 steps:
•Identifying the predicament/situation
•Specifying the criteria for choosing a particular solution(colour,cost,time,size etc.)
•Creating alternatives
•Analyzing and compare alternatives
•Choosing the best alternative
•Implementing that alternative
Decisions are made in three classic environments.
Certainty: The decision maker is basing their decisions on information that they know is true and will confidently choose the alternative that has the highest payoff
Uncertainty: The decision maker does not have any reliable information on which to base their decisions or they lack the confidence the information that they do have already.
Risk: The decision maker is basing their decisions on information that is probably true as garnered from estimates from experts or reflected in historical references.
For The Record:
Probability was originally defined as “ A measure of likeliness, that an event will occur.” In contrast, the contemporary definition of probability is, “ a measure of the weight of empirical evidence, and is arrives at from inductive reasoning and statistical inference.”
Decision Making Tools
Decision Analysis was coined in 1964 by Stanford professor, Ronald Howard. It’s used by many major corporations in making huge billion dollar investment decisions. In 2010, Chevron won the Decision Analysis Society Practice Award for its own use of decision analysis.
Watch this video (http://www.youtube.com/watch?v=JRCxZA6ay3M ) featuring Chevron’s Vice Chairman George Kirkland who champions decision analysis as an integral part of how Chevron does business for one simple, and powerful reason. It works!
You should be be wary of what is called “analysis paralysis”. It's over-analyzing/thinking a situation to the point where decision is never made nor is one put into effect, ultimately paralyzing the outcome. It’s better to at least try something and then make a change if need be. A perfect solution might not always be achieved instantly, however, the fear making any decision must not block your way to a better solution.
Calculations can get very complex if there numerous values are uncertain and/or if many outcomes are linked. In spite of a couple possible short comings, research shows that the utility of decision analysis in creating decision-making algorithms are superior to that of raw intuition.
Some of the outstanding advantages of decision analysis include:
•Simple to understand and interpret.
•Valuable even with very little hard data, because insights can be generated based on experts describing a situation.
•New scenarios can be added.
•Worst, best and expected values can be determined for different scenarios
There is a raft of decision making games & software on the internet for both adults and children, for both business & personal use. Just search for
“Decision Software” or “Decision Games” etc.
1.Pairwise Comparisons (head-to-head)
In 1927 a psychometrician named L. L. Thrusting,developed The Law of Comparative Judgment. It’s a scientific approach to measuring and comparing options. Psychometrics is the measurement of an individual's
psychological attributes, including the knowledge, skills, and abilities.
It’s called Pairwise Comparisons and is a great tool to help you establish your priorities and make decisions in situations where the options are completely different, or your evaluation criteria are subjective.
You can customize the Pairwise Comparisons Method to prioritize your activities and make decisions, just as Emmanuel prioritized his activities. It’s basically a method wherein you match up all of your actuates/options head-to-head.
The simplest way to do this is with a table in an X-Y axis. List each activity/option that you want to compare in a column on the left hand side. On the Y axis, make a row of these same activities, going left to right.
Compare each activity in turn, goes head-to-head with each other. You decide which of the two options is more important A single point is awarded to the wining activity and a half a point is awarded in case of a tie.
When all comparisons are completed, you can easily rank them in order of importance by number of points they have.
For example you may be an engineer trying to out which type of material to use in the production of a a new product you’re taking to market. The engineer has determined that in order to manufacture the best possible product, he must determine which of his criteria is most important when considering the design of his product. His criteria are:
•Safety
•Aesthetics
•Cost Effective
•Practical
According to the results safety is the most important element in the design of the new product. How it looks is the least important. He can now go about allocating his resources clearly, confident that he will be successful in achieving his goal. Of course, common prevails at all times in the final decisions.
2. Decision Matrix (options vs factors)
Stuart Pugh a design engineer, who taught at the University of Strathclyde in Glasgow invented the decision matrix method. It ‘s a technique used to rank the multi-dimensional options of an option set. It’s original use was for making engineering design decisions, but is used to rank all types of options such as investment options, vendor options, product options, even decision options.
The strength of this system is that it allows you to make rational and confident decisions, while taking many different factors such as time,service levels,technology etc. into account.
Basically, a decision matrix is a scoring system for a set of options which can then be ranked according to their individual scores. It is not weighted to allow for a quick selection process.
On the other hand, a weighted decision matrix weights the criteria in order of importance. These scores better reflect the importance to the decision maker of the criteria involved, therefore the more important the criteria the higher the weighting it is given. Each of the options are scored and multiplied by the weighting factor given to each of the criteria.
The advantage of the decision making matrix is that subjective opinions about one alternative versus another can be made more objective. Another advantage of this method is that sensitivity studies can be performed. An example of this might be to see how much your opinion would have to change in order for a lower ranked alternative to out rank a competing alternative.
How To Use The Decision Matrix Tool
Identify your criteria/factors.For example, you’re looking for a new car
with certain criteria/factors such as:
•Reliability
•Financing
•Electric Power
•Cost 25K or less
•Gas consumption 50 kpg or better
•Safety
Next,score each option in its’ importance to each of factors/criteria.
Use a simple scheme from 0-3. A score of 0 means it’s not that important. A score of 3, indicates high priority. You can create your own values here.
Now assign the relative weight of importance that each factor has on your decision. Again use numbers from 0-3, or make your own values. A weight of 0 means that the factor is has little or no influence on your decision and a weight of 5 means that it’s very influential to your decision. If you difficulty in determining the relative weighting or ranking of the criteria, simply use the
Finally, multiply each of the scores from step 2 above, by the values for the weighted importance of the factor that was calculated in step 3. This gives you the weighted score for each option-factor combination.
Toyota comes in as the hands down winner,but, the Kia might be your final decision, because although it’s almost the same score as the Toyota, it has much better fuel consumption score than the equally priced Ford. So in reality price & fuel consumption were more important to you, than you originally thought.
3.Decision tree
A Decision Tree is an abstraction and simplification of the real problem. It allows you to visually lay out all of your possible options and asses the risks and rewards associated with the outcome of each option, thereby helping you to form a course of action. There must also be a finite set of outcomes for each option, and one decision criterion can be considered at a time.
Let’s say you’re making plans for your next vacation, and you’re considering things such as: airline, cost, climate, language, safety, hotels, season, ground transportation,food, meeting local people, etc.
Start by brainstorming a list of all of the variables involved in your decision making problem, then prioritize them.
You’ve decided that ”meeting local people” is the most important option of your vacation, and you want to determine the most effective way, yet economical way to do it.
See figure 2F for a possible solution
So you end up deciding to rent a car with a bike carrier for your rented bike. This allows you to travel quickly and safely from city to city where you can explore by bicycle on your own. Furthermore you decide not to hire a tour guide and spend the $280 you would save by not taking a bus tour,(600-55-265=280) on taxi fares. The taxi drivers always know the best places to go...just ask them. Best of all their advice is free. You now benefit from the best of all three options in a most economical manner.
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