Effective Decision-Making: A Systemic Approach
Unit 5: Making Systems
Making Systems
To decide is to rationally exercise the right to choose among a set of alternatives or courses of action.
The Process of Decision
Every act of deciding can be divided into three stages:
1. The desire to make a decision, or action will have a problem imposed necessity. (Present).
2. Making the Decision – Action (immediate future).
3. The result that produces the decision (the more distant future)
Decision-making requires:
1 – Two or more courses of action or alternatives.
2 – A Decider, i.e., the person who decides.
3 – The chosen alternative best meets the objectives of the desired end.
System Subsystems Decision:
The Decision System of Organizations is composed of two parts: the Analytic and Choice.
The Analytical Subsystem analyzes alternatives or input data based on the objective and the available alternatives in various scenarios.
The choice-subsystem takes as input the outputs of the Analytical Subsystem and selection criteria, and as outputs the expected values for the objective.
The entries in the reference system can be classified as controllable and uncontrollable. Examples:
a) Completely controllable inputs: the quantity to produce, promotion, advertising, etc.
b) Uncontrollable inputs: market demand, competitors’ actions, and so on.
First way to classify the decisions
Programmed vs. Unscheduled Decisions
Programmed decisions are repetitive, predictable, stable, and related to known variables, with certainty in present and future situations.
Unscheduled decisions involve change, non-repetitive, unstructured, unpredictable situations with a high degree of risk, uncertainty, instability, and external factors.
Decisions that are not programmed are typically made by senior management.
Elements of the Decision:
1 – Objective: The subject on which to decide.
2 – Alternatives: The various alternative courses of action.
3 – Conditioning Factors / States of Nature: Variables or aspects of context that may influence the results of each alternative.
Decisions are made under conditions of certainty, risk, or uncertainty.
There is certainty when the status or value of these variables is known.
A decision under risk means that while information is available on all possible behaviors of the constraints, it is uncertain which behavior will occur.
There is uncertainty when there is no information to estimate the behavior of the determining factors and their resultant values or states.
4 – Consequences
5 – Results obtained
Appropriate Selection Criteria for Choosing the Most Convenient Outcome
Maximin Criterion (Worst)
The decision-maker assumes the most unfavorable state of nature will occur. This criterion is for a pessimist whose highest aspiration is to get the best from the worst.
Disadvantages: It does not consider most of the information matrix, only the worst results of each event.
Maximum Criterion (OPTIMA)
It assumes the best state of nature will occur for each alternative. It is for an optimist who considers only the brightest possible reward and ignores all other contingencies.
Disadvantages: It ignores all intermediate results, even slightly lower ones. It does not use all the information in the matrix.