2.2 Decision Making

Question 1

What is a decision tree

Answer 1

Mathematical model that represents the likely outcomes for a business of a number of courses of action on a diagram showing the financial consequences of each

Question 2

Expected value and formula

Answer 2

Financial outcomes from a specific course of action adjusted to allow for the probability of it occurring

Probability x financial result

Question 3

Net gains

Answer 3

Expected value - costs

Question 4

What is opportunity cost

Answer 4

Idea that money or time spent doing one thing means missing out on doing something else

Question 5

What is risk vs reward

Answer 5

The probability of a negative vs a positive outcome

Question 6

Steps of scientific decision making

Answer 6

1. Set objectives
2. Gather and analyse data
3. Select a strategy
4. Implement the decision
5. Review the decision

Question 7

Benefits of scientific decision making

Answer 7

-based on evidence + research
-systematic approach (validates data)
-data driven *only as accurate as input
-removes some subjective judgement

Question 8

Drawbacks of scientific decision making

Answer 8

-No qualitative data taken into account
-may still rely on assumptions
-doesn’t guarantee correct decision
-may ignore crucial aspect of business experience

Question 9

Benefits of intuition decision making

Answer 9

-quick decision
-cheaper
-experience (learn from it)

Question 10

Drawbacks of intuition decision making

Answer 10

-hard to justify decision
-no supporting evidence
-bias , opinion based
- high risk

Question 11

Factors affecting approach to decision making

Answer 11

1. Urgency of decision
2. Information available
3. Size of business
4. Predictability of the situation
5. Character of the person or culture of the business