Understanding Management Decision Making

Question 1

What are risks

Answer 1

Risk is the chance of incurring misfortune or loss.

Question 2

What is uncertainty

Answer 2

A situation in which there is a lack of knowledge and events, outcomes or consequences are unpredictable.

Question 3

What is an opportunity cost

Answer 3

The next best alternative foregone.

Question 4

What is scientific decision making

Answer 4

Based on data and uses a logical, rational approach to decision making.

Question 5

What does the scientific decision making process invoke

Answer 5

• Recognising that there is a problem or opportunity (decision to make).
• Setting objectives for what you want to achieve.
• Setting decision criteria and deciding how important each one is.
• Developing and identifying alternatives.
• Comparing the alternatives by analysing the available data.
• Choosing and implementing a course of action.
• Reviewing the effectiveness of the decision.

Question 6

What is a decision tree

Answer 6

A 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 7

Why are decision trees useful

Answer 7

• It makes managers think about the different options they have and consider the possible consequences of each other.
• Using decision trees may result in a more logical, less rushed process based on evidence.
• It forces managers to quantify the impact of each decision considering the forecast costs, benefits and probabilities of events happening.
• Decision trees provide a logical comparison of the options available to managers at a given time.

Question 8

Why are decision trees not useful

Answer 8

• Decision trees only include financial and quantifiable data, they do not include qualitative issues.
• Decision trees use estimates of the probability of different outcomes and the financial consequences of each outcome.
• It is difficult to use decision trees effectively when the range of possible outcomes is not clear.
• Some managers may use decision trees to justify a decision.

Question 9

Influences on decision making

Answer 9

• The business’s mission and objectives.
• Ethics- Can provide moral guidelines for decision making by managers.
• External environment- For example, competitors.
• Resource constraints- To make the best decisions managers need the necessary resources, such as labour and time, to be available.