Decision Making Condition & Example Essay

1.1 Introduction Decision Making is very important thing that we do in everyday lives. According to Harris, R (2010), decision making is the study of identifying and choosing alternatives based on the values and preferences of the decision maker and making a decision implies that there are alternative choices to be considered. In addition, we are not on to identify as many of those alternatives as possible but to choose the one that has the highest probability of effectiveness. Just as there are different types of decision, there are also different approaches to decision making that are appropriate in different situation. Some decisions are made logical and rational thinking, while others are made using experience and sometimes based on the performance of a practiced skill. Decision making also can be described as the act of choosing one alternative from among a set of alternatives available. The decision making process includes recognizing and defining the nature of a decision situation, identifying alternatives, choosing the best alternative, and putting it into practice. In the decision making environment, there are three categories that is decision in certain condition, in uncertain condition and also in risky condition. The certain condition in making decision is where we have confidence and belief to get the best outcome in a single answer. The decisions maker also have to gain the comprehensive information regarding the situation occur in order to assist in his/her decision making. Meanwhile, uncertain condition in making decision is when the decision maker does not have knowledge of information where it is impossible to accurately describe for future outcome, more than one possible outcome. The decision maker also needs to have a high tendency towards risks to make the decision. Risky condition in making condition is where the decision maker has very limited of information and as a result, it is hard for them to predict the outcome. This risky condition can only be assumed based on information provided and probability that situation will occur and whether the situation really happen or otherwise cannot be completely ascertained as suggested by Shahrul A.A. et al (2011). He also said that decision maker or manager has limited information to assist in making the decision in risky condition even though the information obtains is not complete. In this topic, we will analyze the three conditions in decision making environment, examples for each category and also conclusion for the topic. 2.0 Decision Making in Certain Condition Decision making in certain condition implies that we know with 100 percent accuracy what the states of nature will be and what the expected payoffs will be for each state of nature. Harold. K(2009). He also believed that decision making under certainty is the easiest case to work with because with certainty, decision maker assume that all of the necessary information is available to assist them in making the right decision, and their can predict the outcome with a high level of confidence. This condition is ideal for problem solving and it is simply to study the alternatives and choose the best solution. Decision making in certain condition also occur when we know all information about alternatives and the best chosen one is the most effective. Meanwhile, Dr. John Bukowski (2012), believed that one method we can use to help decide is the cut-off screening method. Here, the decision maker predetermines a cut-off for each criterion. Then, the decision maker goes through each criterion and eliminates any choices that don’t meet the cutoff. If more than one choice remains, the decision maker could consider additional criteria or restrict the cutoffs. If all choices have been eliminated, the decision maker can relax the cutoffs. 2.1 Example of Decision Making in Certain Condition There are several examples using the certainty condition in different kind of situation. One of the example, is during making a choice of transportation from point A to a point B. Transportation ABC can take the person from point A to a point B in 10 minutes with the amount of RM 2.00. While transportation XYZ can take the person in 15 minutes with the same amount. With having limited time and money, and using the information completely given, the rational decision maker is able to know the best choice of transportation that he/she have to use to get to the destination, that is transportation ABC. In this situation, the decision maker can make the decision easily without any other probability of deciding for other option. 2.2 Second Example of Decision Making in Certain Condition Another example of making decision in certain condition is buying a new house. Mr. Ali is working at the city but he is currently living in flat house and his house located quite a distance from his workplace. Mr Ali getting promoted to the senior level, thus, he is thinking to buy a new house. His budget is RM 300,000 and he is looking for a house near at his workplace. House option A provides a bungalow house that near to the workplace, but the price is higher than his expectation that is RM 500,000. Meanwhile option B provides a new double-storey house also near to his workplace but with a less amount that is 280,000. From the information, Mr. Ali can make a decision using his budget limitation and also time saving going to work daily, the best option for Mr. Ali is Option B. 2.3 Third Example of Decision Making in Certain Condition The next decision making is on certainty is buying a car. Mr. Edward have his own family with 3 kids. Currently, Mr. Edward want to upgrade his car from his compact car into MPV size and is willing to pay not more than RM85,000 for the new car. There are several car manufacturers that selling the MPV Segment that is Proton Exora that cost RM 80,000 with value for money, good re-sell value and good maintenance. While Nissan Grand Livina will cost RM 90,000 and Toyota Wish will cost him RM 130,000. Using this information, Mr Edward have sufficient information to decide which one is the best option in term of value for money, maintenance, quality, insurance, and also re-sell value. Using this complete information, and the decision that based on facts, opinions and reasonable info, the best option for Mr Edward is Proton Exora. 2.4 Fourth Example of Decision Making in Certain Condition Mr. Gopal are trying to decide between three used cars, all of which are priced the same. If he want to buy used car number one, there is a 70 percent probability that he will have to spend RM400 to get the engine back in shape. However, there is a 30 percent probability that the engine will have to be replaced, which will cost him RM2, 000. If he chooses car number 2, there is a 50 percent probability that he won’t have to spend any money at all, a 30 percent probability that radiator repairs will cost only RM450, but there is a 20 percent chance that the car will require a new set of radiator that will cost him RM 1,500. If he choose car number three, he will face a 60 percent probability of an RM200 transmission repair, a 35 percent probability of a small transmission adjustment, and a 5 percent possibility that he will need to spend RM500 to fix the engine and the transmission. After considering information that he have and the cost for repairing of each used car, the best buy for him is the used car number 3. 3.0 Decision Making in Uncertain Condition A decision making in uncertain condition is when there are many unknowns and no possibility of knowing what could occur in the future to alter the outcome of a decision. It is also when the information received by decision maker is so poor that he/she cannot even assign probabilities to the likely outcomes of alternatives, thus making it an uncertain condition. Decision making under conditions of uncertainty is also an everyday task. When we decide whether or not to go out without bring the umbrella fearing it will rain, when deciding on whether or not to wear a helmet for cycling on the street or when deciding whether to take the bus or bus to work, the decision maker have to make a decision that involves outcomes that are in uncertain condition. According to Martin T. Schultz et al (2010), uncertainty can be classified either as input uncertainty or model uncertainty. Input uncertainty arises from a lack of knowledge about the true value of quantities used in analyzing a decision. In practice, model uncertainties are much more difficult to deal with than input uncertainties because they require the analyst to propose and evaluate competing models (Casman et al. 1999). 3.1 Example of Decision Making in Uncertain Condition Ahmad runs a small company that manufacture low-cost ergonomic stool and he sold via the Internet. His company has several popular models, each with annual sales of RM100,000 to RM150,000. He has an opportunity to invest in a new technology of manufacturing stool. Ahmad knows that a new technology will cost RM220,000 and is unsure whether there will be sufficient demand for the stool to cover this large investment. If the market is good, he thinks he can sell 4,000 chairs at a profit of RM100 each, generating a cash flow with present value of RM400,000. On the other hand, if the market is poor, he thinks he might sell only 1,000 chairs, generating a cash flow with present value of RM100,000. In this situation, ahmad does not have any information to help him decide and it is hard for him to make a decision from each probability that he made. Therefore he must use his rational and his business experience to make a best choice in order not to make his company loss in profit. Ahmad needs some skills and methods to make decisions under uncertainty. He needs techniques that match the limited time and money budgets of his small company. Therefore, this situation on decision making, he will try to have higher propensity and more practical level for the small business. 3.2 Second Example of Decision Making in Uncertain Condition Hassan, who is recently retired, has the opportunity to pursue his lifelong dream of operating a charter fishing business on the Langkawi Island with his retire savings of RM 50,000. Hassan has located a used charter fishing boat that he can purchase for RM 40,000. He realizes that this is a risky investment with many uncertainties, but he must reach a decision on whether or not to buy this boat by the end of the month. If he does not operate a charter fishing business, he will leave the money in an existing investment that is guaranteed to yield a 5% annual return. Hassan’s decision has been framed as a choice between a charter boat investment and an alternative investment. If the profits from his charter boat investment would exceed the returns from the alternative investment, he will invest in the charter boat. In this example, Hassan has applied the passive approach to adaptive management because the information he uses to update his decision is not obtained. Although the information is not obtained as part of the decision-making process, he used past experience and information to make the decision. According to Dr. Hossein, A.(2001), Business decision making is almost always accompanied by conditions of uncertainty. Clearly, the more information the decision maker has, the better the decision will be. Treating decisions as if they were gambles is the basis of decision theory. This means that we have to trade off the value of a certain outcome against its probability. 3.3 Third Example Decision Making in Uncertain Condition Another example is when analyze the weather patterns in the city ABC, forecasted by meteorological department. Sometimes the data provided by meteorological department is not always accurate to the people thus involved uncertainty condition. The most common weather that usually occurs was high winds, heavy rain, and lightning storm. For example they are predict City ABC will get a storm and heavy rain at night and as a result one of the live concert will be held at night do not know whether to cancel the show or go on due to the forecast. In this situation, people will understand that forecasts involve uncertainty with the future weather forecast because when they do not enough information, they have to estimate on their own and in this uncertainty, people have only a rely data base, they do not know whether or not the data are reliable, and they are very unsure about whether or not situation may change. According to Keltie, Denise.(2007), they used both rules and tools to deal with the uncertainty created by weather conditions and in terms of rules, they often relied upon heuristic strategies (cognitive rules of thumb) to help with decision making. 3.4 Fourth Example Decision Making in Uncertain Condition A local film producer has a developed a script and it is starting to cast the movie. The budget allows for the film is RM 50,000 for the male lead actor and RM 30,000 for the female lead actor. There are three actors that may be suitable for the male lead, and just two female actors that may fit the part of the leading lady. How does the producer decide on the individual actors and on the combination of two actors? According to Sharaf N. R.(2012), he suggested that in areas such as movie business, book publishing, and television programming, decisions are often reached on intuition, hunches, opportunities, and the pressure that a decision has to be made by a certain date. He also said, in the absence of time, relevant data, and funds, the decision makers rely on their intuition, gut feelings, and experience. In such situations, common sense suggests that an experienced person is more likely to make a better decision than an inexperienced person is. 4.0 Decision Making in Risky Condition In a risky situation, factual information may exist, but it may not complete. Rowe, W (1988) believed that whenever the decision maker has some knowledge regarding the state of nature, he/she may be able to assign subjective probability estimates for the occurrence of each state and in such cases, the problem is classified as decision making under risk. Shahrul A.A (2011) suggested that the decision maker will not know for sure the situations that will occur in the future and minimal information will only give some insight in predicting what will occur. He also said, whether the situation really will happen or otherwise, cannot be completely ascertained. The situation in risky condition usually related to management that has to deal with the market, insurance and investment. With limited resources and information, it becomes clear how important to make the right decision to avoid any losses or damage for decision maker. According to Geoffrey, C and Thomas, W. (1999), in risky condition, decision maker must assign a probability to each State of Nature and in some cases, research will reveal historical relative frequency information that we might conclude reveals the underlying probabilities. 4.1 Example of Decision Making in Risky Condition One example of risky decision can be seen in car running system. Car used to have simple ignition systems, with a distributor driven from the engine, the accelerator was a linkage from the pedal to the old system of carburetor. If the car was not running right, or there was another problem, it was simple to monitor and repair. Today’s car ignition systems are computer controlled with many sensors and actuators, the linkage from the gas pedal has been replaced with a computer, and the carburetor has been replaced by a fuel injection module. If something goes wrong, we can read out a manual code and try to determine which of the components and interconnections for each of the problem. The car running system is an example of the need for a more formal approach to risk based decision making and also risk management in car design and technology. 4.2 Second Example of Decision Making in Risky Condition Another example of a decision made under risky condition might be in the following situation, A manager in a supplier department decides to spend RM1,000 on a magazine ad believing there are three possible outcomes for the advertisement to have influence in their sales. A 25 percent chance the advertisement will have only a small effect on sales, a 55 percent chance of a moderate effect, and a 20 percent chance of a very large effect. This decision is made under risk because the manager can list each potential outcome and determine the probability of each outcome occurring. 4.3 Third Example of Decision Making in Risky Condition The following situation is in hypermarket department store. Their monthly sales statement for every month is increase. Thus, their manager is able to assume that the company will obtain net profit this year after making losses last year. Without obtaining other information such as operational cost, change of taste in consumers and environment influence, they can only assume that the company will obtain a profit based on the sales trend for the past few months. Therefore, state that the probability that the company will obtain profits is 60% and the probability that the company will make losses is 40%. With this, the manager will make a decision to increase investment. Here, the manager made a decision in a risky condition that is, it is not known whether the company will really be making a profit or otherwise. 4.4 Fourth Example of Decision Making in Risky Condition An example of a decision made under risky condition would be, for a manager of a medical research company, the decision of whether to spend RM 10 million on the research and development of a new technology on surgery equipment. The profits from the research and development spending will depend on whether the government will imposes new plan for the price regulations on new technology in the medical industry. Thus, on this condition, the manager must take the risk whether to carry on with the plan or cancel for the research. The two states of nature facing the manager in this problem are, 45 percent the government will impose price regulations or 55 percent the government will not impose price regulations for the new technology. While the manager have the limited information with the profits that will occur under either state of nature, the manager has risky condition of the probability that price regulations will be imposed on new technology. Under such conditions, a decision is made under risky condition. 5.0 Conclusion The decision making is an everyday task for us. We make decision making in environment using three kind conditions in everyday of our life, whether when we should use the car to go work, when we buying a new house, make a investment, expand our business, travelling and more. There is a lot of possibility and choice that we have to decide using these three conditions that is certain condition, uncertain and risky condition. We have to decide using the information and experience because good decision making requires not only knowing the facts, but also understanding the limits of knowledge. If we don’t have good understanding, experience and knowledge in decision making, we might ended in losing profits in our investment, regrets in purchasing a new car or house and even loss in our business. 6.0 References : Casman, E.A., M. G. Morgan, and H. Dowlatabadi. (1999). Mixed levels of uncertainty in complex policy models, Risk Analysis 19(1):33-42. [3 November 2012] Daniel Straub, Isabell Welpe. (2011). Decision-making under risk: a normative and behavioral perspective. Geoffrey Churchill, Thomas Whalen. (1999). Robinson College of Business Georgia State University: Decisions under Uncertainty. Retrieve at http://www2.gsu.edu/~dscthw/8350/decis-w.pdf [16 November 2012] Harris, R. (2010, November 22). Evaluating Internet Research Sources. 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