3.2.2 Decison Makinh Flashcards
Define intuition
Judgement made on qualitative criteria- like guess work
What is short-termism
A tendency with a business to focus on short-term results- at the cost of long-term success
What is a strategic decision
One that is made in circumstances of uncertainty and where the outcome will have a major impact on the medium- to long term future of the organisation
What is a tactical decision
Deciding what to do in circumstances that are immediate (short-term) and where a mistake is unlikely to have a major impact on the business
What are the approaches to decision making
Hunch
Scientific
Programmed
Non programmed
What is the process of decision making (5)
Setting objectives, gathering and interpreting information, selecting the chosen option, Implementing a decision, reviewing
What are the two approaches to decision making
Hunch and scientific
What is a hunch decision
Based on intuition, gut feel and experience
• Quick!
• Risky!
What is a scientific decision
SCIENTIFIC
• Based on data
• Time-consuming & costly
• Supported by Big Data
What is a programmed decision
Familiar and routine decisions
What is a non programmed decision
Less structured and require unique solutions
What are 5 key influences on business decisions
-Business Objectives / Budgets
-Organisational Structure - Who Makes the Decisions?
-Attitude to Risk
-Availability & Reliability of Data
-The External Environment
What is an opportunity cost
The cost of missing out on the next best alternative
The benefits that could have been gained by taking a different decision
Why opportunity cost is important
resources are limited (particularly startups)
• When resources are scarce, significant decisions about what to spend and where to focus become more risky
What is a node
Node: a point in a decision tree where chance takes over. It is denoted by a circle, and at that point it should be possible to calculate the expected value of this pathway.
What is expected values
Expected values: these are the forecast actual values adjusted by the probability of their occurrence.
What is a net gain
Net gains: subtracting the initial outlay from the expected value to find out whether or not a decision is likely to produce a surplus.
What is probability
Probability: the likelihood of something occurring, usually expressed as a decimal
What is a decision tree
Decision Trees: A mathematical model, used to help managers make decisions and uses estimates and probabilities to calculate likely outcomes
What are the advantages of using decision trees
Choices are set out in a logical way
• Potential options are considered at the
same time
• Use of probabilities enables the “risk” to be considered
• Likely costs and financial benefits considered
• Easy to understand
• Tangible results
What are the disadvantages of using probability trees
Probabilities are just estimates (chance of error?)
• Uses quantitative data only – ignores qualitative/ feelings/ opinions
• Probabilities and values prone to bias
• Doesn’t necessarily reduce the amount of risk
