Manager Decision making

Question 1

decision

Answer 1

choice between at least two alternatives of actions
available to the decision maker
no matter whether the choice is made consciously or unconsciously

determined by the decision field

Question 2

decision field

Answer 2

includes all factors that have to be considered in the decision

all possible alternatives of action = field of alternatives
all environmental situations
the results (= field of results, results matrix)

Question 3

field of alternatives

Answer 3

part of the decision field that can be influenced by the
decision maker

contains all (at least two) alternatives of action

must contain all possible actions of the decision maker
alternatives of action must exclude each other

Question 4

environmental situations

Answer 4

part of the decision field that cannot be influenced by the
decision maker
all environmental factors relevant for the decision (external + internal factors)

Question 5

field of results

Answer 5

aggregation of the results from choice of alternative in environmental situation

Question 6

environmental conditions

Answer 6

Situation of Certainty: perfect level of information, probabilities of occurrence are 1 or 0.

Situation of Risk: imperfect level of information, probabilities of occurrence are between 0 and 1. Subjective or objective.

Situation of (Complete) Uncertainty: no probability of occurrence assigned, it is known that any environmental condition will occur.

Question 7

Types of Decision Models

Answer 7

of objectives (single vs. multiple objectives)

of decision makers (single vs. multiple person (group))

chronological interdependency (static, make d. independently from upcoming vs. dynamic, impacting upcomping d.).

level of information (certainty, risk, uncertainty)

Question 8

Decision Models in the Situation of Certainty - Lexikographical Order

Answer 8

Objectives arranged according to decision maker’s preferences.
Most important objective is the standard of evaluation.
makes sense if one objective clearly dominating all other objectives

Decision rule: choose the alternative that best meets the clearly dominating objective.

Question 9

Decision Models in the Situation of Risk - Risk Attitude

Answer 9

consider the risk attitude of the decision maker

Risk averse: smallest danger of sustaining a loss
Risk-seeking: highest possibility of profit
Risk neutral: trade off loss against profit, best alternative on average

Question 10

Bayes-Rule (Expected Value Principle)

Answer 10

Situation of Risk
Assumes risk neutrality of the decision maker
Expected Value: E(p) = e_ij * p_j
Decision rule: choose alternative providing the highest expected value

Question 11

Maximin-Rule (Minimax-Rule, Wald-Rule)
maximax

Answer 11

extremely risk-averse behavior of the decision maker
Decision rule: choose the best result assuming occurrence of most adverse (worst) environmental situation -> maximum of the minima

maximax: thus the maximum possible profit (advantage, benefit)

Question 12

Hurwicz-Rule (Pessimism-Optimism-Rule)

Answer 12

Compromise between Maximin-Rule and Maximax-Rule.
Optimism-Parameter (λ) expresses the risk attitude of the decision maker.

corresponds to the Maximax-Rule when using λ = 1 and to the Maximin-Rule when using λ = 0
the best result is multiplied by λ, the worst result is multiplied by (1 – λ)

Decision rule: choose the alternative providing the highest overall benefit.

Question 13

Laplace-Rule

Answer 13

Assumption: all environmental situations have the same probability of occurrence.
Decision rule: choose the alternative providing the highest expected value.

Question 14

Savage-Niehans-Rule (Minimum-Regret-Rule)

Answer 14

Decision maker tries to minimize forgone benefit from not choosing the best (minimize regret measure)
strongly risk-averse attitude of the decision maker
Decision rule: choose the alternative providing the smallest regret measure of the maximas of regret

Question 15

Decision Tree

Answer 15

Graph representing all relevant consequences of a decision.
Elements:
Decision Knots (E): rectangles indicating decisions.
Contingency Knots (z): circles indicating the occurrence of contingent incidents.
Results Knots (R): rhombus indicating the results of decisions and/or prior contingent incidents.
Edges: links between decision knots, contingency knots, and results knots.