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Decision-making Techniques
dr. hab. Jerzy SupernatInstitute of
Administrative StudiesUniversity of Wroclaw
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Decision-making Techniques

• Elements of decision problem
• The decision body.
• The decision options (courses of action).
• The uncontrollable factors.
• The consequences.

dr. hab. Jerzy Supernat
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Decision-making Techniques

• The decision body
• single decision maker
• multi decision-maker decision body

There are very few decisions which can be reached
by a single decision maker with total disregard
for others views. Even when the formal
procedures of an organizations dictate that an
individual has the responsibility for making the
decision, the views of interested parties will
usually need to be sought and the tacit agreement
or acquiescence of other individuals and groups
obtained. Clearly the implication is that all
members of the decision body do not have the same
degree of influence on a decision.
dr. hab. Jerzy Supernat
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Decision-making Techniques

• Where collective decisions over matters of common
  concern have to be taken, the collegium system is
  traditionally adopted. The system requires that
  the individual's judgments should be pooled in
  such a way as to make sure that
• the group always bears in mind its (agreed)
  objectives
• every member of the group participates
• all relevant information is made available to
  every member of the group
• a majority vote determines the ultimate choice
• The approach is designed to ensure that factors
  other than those contained within the immediate
  decision situation do not impinge on the choice
  process. It is not, however, uncommon for
  historical residues to produce coalitions or
  antagonisms within decision bodies, leading to
  choices being made other than on the strict
  merits of the case.

dr. hab. Jerzy Supernat
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Decision-making Techniques
Groupthink Groupthink occurs when a group makes
faulty decisions because group pressures lead to
a deterioration of mental efficiency, reality
testing, and moral judgment (Irving L. Janis)
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Decision-making Techniques

• Symptoms of groupthink according to Irving L.
  Janis
• Illusion of invulnerability Creates excessive
  optimism that encourages taking extreme risks.
• Collective rationalization Members discount
  warnings and do not reconsider their assumptions.
  
• Belief in inherent morality Members believe in
  the rightness of their cause and therefore ignore
  the ethical or moral consequences of their
  decisions.
• Stereotyped views of out-groups Negative views
  of enemy make effective responses to conflict
  seem unneces-sary.
• Direct pressure on dissenters Members are under
  pressure not to express arguments against any of
  the groups views.
• Self-censorship Doubts and deviations from the
  perceived group consensus are not expressed.
• Illusion of unanimity The majority view and
  judg-ments are assumed to be unanimous.
• Self-appointed mindguards Members protect the
  group and the leader from information that is
  problematic or contradictory to the groups
  cohesiveness, view, and/or decisions.

dr. hab. Jerzy Supernat
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Decision-making Techniques
The decision options Decision options are the
alternative courses of action between which the
decision body must choose. Options lie at the
heart of decision-making because, unless there is
more than one way to proceed, then there is no
choice to be made and therefore no decision. The
number of options in a decisional problem can be
anything between two and infinity (one type of
decision where the options are always infinite is
the case where the decision variable is
continuous).
dr. hab. Jerzy Supernat
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Decision-making Techniques
Where to elect there is but one, tis Hobson's
choice take that or none. Thomas Ward
(1652-1708)
dr. hab. Jerzy Supernat
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Decision-making Techniques
The Hobson behind Hobson's Choice lived in
Cam-bridge, England during the late 16th and
early 17th cen-turies. Licensed to carry
passengers, parcels, and mail between Cambridge
and London, Thomas Hobson kept a stable of about
forty high quality horses. As a sideline, he also
rented out his horses to university
students. After students began requesting
particular horses again and again, the liveryman
realized certain horses were being overworked.
That inspired Hobson to come up with a new system
of rotating the horses for hire. Hobson gave
customers looking for horses the choice of taking
the one nearest the stable door or taking none at
all.
dr. hab. Jerzy Supernat
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Decision-making Techniques

• The other major characteristic of decision
  options concerns how discernible they are at the
  start of the decision process. Some decision
  problems have options which are obvious when the
  problem is defined. In other decision problems,
  the precise nature of the options is not
  immediately apparent. In fact, the options within
  a decision problem can turn out to be a mixture
  taken from a continuum which goes between totally
  defined at the beginning of the decision process
  and completely novel and developed specifically
  for the decision in question. Henry Mintzberg
  classifies decision options by whether they are
• given fully developed at the start of the
  decision process
• found ready made fully developed in the
  environment of the decision and discovered during
  the decision process
• modified ready-made options with some
  customized features
• custom made developed especially for the
  decision in question

dr. hab. Jerzy Supernat
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Decision-making Techniques
The uncontrollable factors Uncontrollable factors
are those parts of the decision problem which,
although having an influence on the final
outcome, cannot be controlled directly by the
decision body. They may be treated as alternative
states of nature (or scenarios), i.e. states
which the environment takes after, and
independent of, the decision itself. When there
is only one uncontrollable factor, the total
possible states of nature will correspond to all
states which that particular uncontrollable
factor can take. When more than one
uncontrollable factor is involved there could be
a state of nature corresponding to every possible
combination of the levels which the
uncontrollable factors can take.
dr. hab. Jerzy Supernat
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Decision-making Techniques

• When considering the uncontrollable factors
  within a decision problem, it is useful to take
  the three following steps
• identify the factors which will influence the
  final consequence of a decision
• identify the states or levels which each
  uncontrollable factor could take
• attempt to predict the likelihood of these
  states or levels occurring for each of the
  uncontrollable factors

dr. hab. Jerzy Supernat
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Decision-making Techniques
The consequences For each combination of a course
of action and the state of nature, there will be
a consequence. Thus, if we have N alternative
courses of action and M mutually exclusive states
of nature there will be N x M possible
consequences. Figure in the next slide
illustrates this as a matrix in which the two
dimensions are the courses of action and the
alternative states of nature.
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Decision-making Techniques
Decision matrix
Probability p1 p2 ... pj ... pm
F D F1 F2 ... Fj ... Fm
D1 C11 C12 ... C1j ... C1m
D2 C21 C22 ... C2j ... C2m
... ... ... ... ... ... ...
Di Ci1 Ci2 ... Cij ... Cim
... ... ... ... ... ... ...
Dn Cn1 Cn2 ... Cnj ... Cnm
dr. hab. Jerzy Supernat
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Decision-making Techniques

• The decision rules (techniques)
• The pessimistic decision rule.
• The optimistic decision rule.
• The regret decision rule.
• The expected value decision rule.
• The expected utility decision rule.

dr. hab. Jerzy Supernat
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Decision-making Techniques
The pessimistic decision rule In this case each
course of action should be analyzed, and the
worst possible outcome for that course of action
should be identified. Next the decision-maker
should select the course of action providing the
best of the worst possible outcomes.
dr. hab. Jerzy Supernat
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Decision-making Techniques
The pessimistic decision rule
dr. hab. Jerzy Supernat
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Decision-making Techniques
The optimistic decision rule In this case each
course of action should be considered, and the
best possible outcome for that course of action
identified. Next the decision-maker should choose
the course of action yielding the best of the
best possible outcomes.
dr. hab. Jerzy Supernat
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Decision-making Techniques
The optimistic decision rule
dr. hab. Jerzy Supernat
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Decision-making Techniques
Should a decision-maker always be a total
optimist? Total optimism means taking into
account only the best outcome for each course of
action.
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Decision-making Techniques

• A decision-maker who behaves rationally should
  consider two things
• the best outcomes and
• the worst outcomes
• modifying their weight (meaning) according to
  his/her optimism (and pessimism).
• He/she can do it applying the coefficient of
  optimism.

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Decision-making Techniques
Calculations based on the coefficient of optimism
of 0.6 (we often accept 0.5, i.e. the half way
point between total pessimism and total optimism)
are as follows
dr. hab. Jerzy Supernat
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Decision-making Techniques

• the higher the coefficient of optimism the
  higher the decision-makers hope for obtaining
  the best possible outcome
• the coefficient of optimism of 1 leads to the
  behavior of a total optimist
• the lower the coefficient of optimism, the
  higher the fear of the decision-maker of
  receiving the worst possible outcome
• the coefficient of optimism of 0 leads to
  behavior of a total pessimist

dr. hab. Jerzy Supernat
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Decision-making Techniques
The regret decision rule The regret decision rule
is based on a deceptively simple but extremely
useful question If we choose one particular
course of action, then, in hindsight, how much we
do regret not having chosen what turned out to be
the best course of action given a particular set
of circumstances?
dr. hab. Jerzy Supernat
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Decision-making Techniques
Calculated values of regret are in brackets. Its
a matter of convention that regret is presented
in positive numbers.
dr. hab. Jerzy Supernat
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Decision-making Techniques
After calculating the values of regret we are
left with the regret table.
dr. hab. Jerzy Supernat
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Decision-making Techniques
Now one has to choose the best course of action
by applying the pessimistic decision rule to the
regret table and choosing the course of action
with minimum of maximum regrets.
dr. hab. Jerzy Supernat
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Decision-making Techniques
Inconsistency in the regret decision rule The
regret decision rule is a powerful and
intuitively attractive idea. It attempts to
minimize the embarrassment we might feel of
making the wrong decision. It is closely related
to the economists traditional concept of the
opportunity cost of a decision i.e. by choosing
one alternative course of action, what
opportunity are we forgoing by not choosing
another course of action?
dr. hab. Jerzy Supernat
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Decision-making Techniques
Unfortunately, as a decision rule the concept has
a major disadvantage if we are choosing the
course of action which will give us the least
cause for regret when compared with another
option, then the degree of regret will depend
upon which other options are considered. This can
bring about problems of logical inconsistency.
In order to illustrate this inconsistency lets
move to the next slide.
dr. hab. Jerzy Supernat
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Decision-making Techniques
The analysis of the problem below shows the best
course of action from a regret rule viewpoint is
process A.
dr. hab. Jerzy Supernat
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Decision-making Techniques
Now, lets assume that an additional process
(process C) has been elaborated allowing us to
obtain the same result. Analysis of the problem,
taking into account the new process, shows that
D2, in this case, is the better option
previously being the worst one!
dr. hab. Jerzy Supernat
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Decision-making Techniques
The expected value decision rule This rule weighs
each outcome by the probability (or likelihood)
of its occurrence. The expected value is the
weighted average of the possible results
anticipated from a particular course of action
where the weights are the probabilities. After
calculating the expected value for each option,
the decision-maker should choose the course of
action with the maximum expected value. It should
be emphasized that expected values are, in
themselves totally hypothetical figures. In
reality, the calculated expected values on slide
76 will never actually occur. The values will be
any of the figures illustrated in the table but
never the expected figure. The expected values
are merely an indication of the value of each
option.
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Decision-making Techniques
Decision matrix
Probability p10.1 p20.2 p30.5 p40.2 EVi
F D F1 F2 F3 F4 EVi
D1 D2 D3 D4D5 -10 10 0 5 14 -5 10 25 8 18 20 10 0 10 2 11 10 25.5 15 16
dr. hab. Jerzy Supernat
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Decision-making Techniques
Probability p10.1 p20.2 p30.5 p40.2 EVi
F D F1 F2 F3 F4 EVi
D1 D2 D3 D4D5 -10 10 0 5 14 -5 10 25 8 18 20 10 0 10 2 11 10 25.5 15 16 10.2 10 10.1 10.1 9.2
dr. hab. Jerzy Supernat
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Decision-making Techniques
Example The decision maker is deciding whether
or not to under-take one of two contracts (A or
B) offered to him. Each contract can lead only to
three possible outcomes. The probabilities and
outcomes are as follows
dr. hab. Jerzy Supernat
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Decision-making Techniques
dr. hab. Jerzy Supernat
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Decision-making Techniques
Our example using a decision tree.
dr. hab. Jerzy Supernat
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Decision-making Techniques

• In order to reach the optimal decision, one
  should analyze the decision tree from right to
  left (the roll-back techni-que).
• Fundamental rules
• The expected value should be calculated for each
  outcome branch.
• The branch with the higher expected value should
  be chosen at each decision node (there is only
  one decision node in our example).

dr. hab. Jerzy Supernat
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Decision-making Techniques
Calculations for each outcome branch EV1 80 x
0.6 10 x 0.1 (-30) x 0.3 40 EV2 50 x 0.5
30 x 0.3 (-10) x 0.2 32 Calculated
expected values can be placed above the relevant
outcome nodes.
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Decision-making Techniques
Decision tree with the expected values.
dr. hab. Jerzy Supernat
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Decision-making Techniques
Moving from right to left we reach the (starting)
decision node where the decision maker must
choose one of three courses of action with
calculated expected values (for the course of
action D3 signing neither of the contracts
profit equals zero). Replacing outcome branches
with their equivalents in the form of expected
values leads to the reduction of the decision
tree.
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Decision-making Techniques
Reduced decision tree.
dr. hab. Jerzy Supernat
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Decision-making Techniques
Using the expected value decision rule, the
decision maker should choose D1, and cut off D2
and D3, as presented below


dr. hab. Jerzy Supernat
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Decision-making Techniques
When the analyzed decision problem pops up
repeatedly in the static decisional situation
choosing D1 (concluding contract A) arises no
doubts. Choosing D1 in each case gives the
decision maker in the long term the highest
outcome.
The expected value decision rule is fully
justified when the decision process can be
repeated many times in the same stable set of
circumstances.
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Decision-making Techniques
However, static decision situations are rare. In
practical terms dynamic situations are prevalent
and, therefore, one-off decisions are not made
twice or more times in identical situations. In
our example the decision maker might fear a loss
of 30 (with probability of 0.3) connected with
contract A (choosing the worse option from the
expected value decision rule contract B, he
risks only 10 with probability of 0.2).
dr. hab. Jerzy Supernat
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Decision-making Techniques
The expected utility decision rule As the
previous slides indicated in the case of one-off
decision the proper analysis should not be the
one using the expected value decision rule.
Rather the analysis taking into account the
decision bodys preferences, in other words, the
analysis applying the expected utility decision
rule.
Utility is a relative value of possible outcomes
taking into account the preferences of the
decision-maker.
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Decision-making Techniques
In descending order, there are seven possible
outcomes in our example 80, 50, 30, 10, 0, -10,
-30 (0 corresponds to choosing neither contract).
Because the scale of a utility function is
discretio-nary, we can define utilities (U) of
extreme outcomes as follows U (80) 1 i U
(-30) 0 Next it is necessary to determine the
utility of the five other possible outcomes.
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Decision-making Techniques

• In order to accomplish this, we can ask the
  decision-maker to make a choice of two
  possibilities
• the first, being the certain outcome (in
  sequence 50, 30, 10, 0, -10)
• the second a gamble on outcomes 80 with
  probability p and -30 with probability 1-p.

80 p 50 (certain)
-30 1-p
(a gamble on outcomes 80 with proba-bility p and
-30 with probability 1-p)
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Decision-making Techniques
At p 0 the decision maker will choose 50, but
increasing the probability of winning 80 we will
reach a spread of probability making both
possibilities equally good for the
decision-maker. This could happen at probability
of 0.9 winning 80 and probability of 0.1 of
loosing 30.
80 p 0 0.1 0.2
0.3 0.4 0.5 0.6 0.7 0.8 0.9 50 (certain)
-30 1-p 1 0.9
0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1
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Decision-making Techniques
Applying the already known utilities,
corresponding with the extreme outcomes of the
game, and having establish-ed the spread of
probability, we can now calculate a utility of 50
(or utility of the game, being the expected value
of utilities of game outcomes at the established
spread of probability)
U (50) U (80) x 0.9 U (-30) x 0.1
U (50) 1 x 0.9 0 x 0.1 U (50) 0.9
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Decision-making Techniques
Repeating the procedure for the remaining
outcomes could show that the probability that
makes the decision-maker indifferent is for 30 as
high as 0.8
80 p 0 0.1 0.2
0.3 0.4 0.5 0.6 0.7 0.8 30 (certain)
-30 1-p 1 0.9
0.8 0.7 0.6 0.5 0.4 0.3 0.2
U (30) U (80) x 0.8 U (-30) x 0.2 1 x 0.8
0 x 0.2 U (30) 0.8 for 10 as high as 0.5 for
0 as high as 0.3 for -10 as high as 0.15
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Decision-making Techniques
Utilities of all outcomes
Outcome Utility
80 50 30 10 0 -10 -30 1 0.9 0.8 0.5 0.3 0.15 0
dr. hab. Jerzy Supernat
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Decision-making Techniques
The expected value analysis used earlier can now
be repeated, only using utility values instead of
monetary outcomes. We calculate the expected
utility for each possible course of action (D1
make contract A, D2 conclude contract B and D3
undertake neither contract) as follows
U1 (contract A) 1 x 0.6 0,5 x 0.1 0 x 0.3
U1 0.65 U2 (contract B) 0.9 x 0.5 0.8 x
0.3 0.15 x 0.2U2 0.72 U3 (neither contract
A, nor contract B) 0.3 x 1 U3 0.3
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Decision-making Techniques
Analysis of the utility of outcomes points to
contract B as the optimal decision. Moving from
values expressed in money to their utilities
(taking into account preferences of the
decision-maker) has brought the change of the
decision.
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Concluding Remark
Once you make a decision, the universe conspires
to make it happen. Ralph Waldo Emerson
dr. hab. Jerzy Supernat