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Decision theory

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overview on decision theory and related topics

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Decision theory

  1. 1. Decision Theory Presented by: Bina Gupta Presented to: Shiva Shrestha 1 BIM Department,HSM 11/10/2014
  2. 2. Contents  Definition  Types of decisions  Decision making conditions  Decision Making Process  Decision Tree  Decision Styles  Decision Theories  Group Decision Making  Improving Decision Making 2 11/10/2014
  3. 3. Decision Making  Decision making is a process of identifying and evaluating choices.  Decision making is the process of choosing the best alternative from the number of available alternative. 3 11/10/2014
  4. 4. Decision Making  Decision making is very important in human life:  In personal life,  Which profession to choose  What to have for dinner  Whether to do home work or watch movie  Whom to marry.  In Business environment,  How much to charge for a product.  Where and how much to invest .  Which candidate to hire for a job.  Which advertising media to adopt 4 11/10/2014
  5. 5. Types of Decision Making Types by frequency  Programmed decisions  decision making that relate to the day to day running of an organization  predetermined rules and procedures  structured type and recurs with some frequency  Decision making is done by low level management 5 11/10/2014
  6. 6. Types of Decision Making  Non-programmed decisions  decisions making with unusual and exceptional problems.  Poorly structured  Decision making is done by top level management 6 11/10/2014
  7. 7. Types of Decision Making Types by nature  Operating decisions  Similar to programmed decision  Day to day decision  Aim at maximizing the efficiency and probability of the organization’s current operations.  Decision making is done by low level management team 7 11/10/2014
  8. 8. Types of Decision Making  Strategic decisions  Focuses on the issues external to the organization.  Concerned with goals and objectives of the organization, selection of product- market mix etc.  Decision making is done by top level management  Administrative decisions  Link between operational and strategic decision  deal with the issues such as rules, procedures, reward system etc.  Decision making is done by middle level management 8 11/10/2014
  9. 9. Decision Making Conditions/Environment  Conditions of certainty  Problems and alternatives are well known  Outcomes are predetermined  Conditions of uncertainty  Problems are known but alternatives are unknown  Not enough knowledge about solutions  Conditions of risk  Risk is involved in each actions of decision making  Outcomes are associated with risk 9 11/10/2014
  10. 10. Decision Making Process 10 11/10/2014
  11. 11. Decision tree  A decision tree is a graphic representation of the strategy-outcome combinations available to the decision maker.  A decision tree consists of nodes, branches, probability estimates, and payoffs.  There are two types of nodes: decision nodes and chance nodes.  A decision node is usually represented by a square and indicates places where a decision-maker must make a decision. 11 11/10/2014
  12. 12. Decision tree  The chance node is represented by a circle and indicates a point, at which the decision-maker will discover the response to his decision, i.e. different possible outcomes occurred from a chosen course of action. 12 11/10/2014
  13. 13. 13 11/10/2014
  14. 14. Decision Styles  There are four decision making styles:  Directive  Analytical  Conceptual  Behavioral 14 11/10/2014
  15. 15. Decision Styles  Directive:  The group leader solves the problem, using the information he possesses.  He/she does not consult with anyone else nor seek information in any form.  This style assumes that the leader has sufficient information to examine all the relevant options and make an effective decision, but that is rarely the case. 15 11/10/2014
  16. 16. Decision Styles  Analytical:  When the leader does not possess sufficient information to make an effective decision, they will need to obtain information or skill from others.  They may not tell them what the problem is; normally, they simply asks for information.  The leader then evaluates the information and makes the decision. 16 11/10/2014
  17. 17. Decision Styles  Conceptual:  The leader explains the situation to the group or individuals whom he provides with relevant information, and together they generate and evaluate many possible solutions.  This style tends to be have a long-term perspective and, as a result, will be more creative and expansive in their approach entailing a higher level of risk for the long-term benefit of the organization. 17 11/10/2014
  18. 18. Decision Styles  Behavioral:  The leader explains the situation to the group or individuals and provides the relevant information.  Together they attempt to reconcile differences and negotiate a solution that is acceptable to all parties. 18 11/10/2014
  19. 19. Decision Theories  Classical Decision theory: Classical view assumes that decision making is based on rational process and always follows the sequence of steps for decision making. 19 11/10/2014
  20. 20. Decision Theories  Behavioral Theory of Decision Making:  Developed By Herbert Simon  Based on administrative model i.e. how decisions are made 20 11/10/2014
  21. 21. Decision Theories  The two main component of this theory are: i. Bounded Rationality:  Decision maker is limited in their Rationality because of different factors such as:  Attitude  Ability  Education  Benefits  Skills  Habits 21 11/10/2014
  22. 22. Decision Theories ii. Satisfying:  Decision Maker tries to satisfy organization objectives with his best efforts  Satisfactory solution is obtained 22 11/10/2014
  23. 23. Group Decision Making  Process of choosing best alternative from the available alternatives  Alternative is chosen through group discussion  Each member actively involved in decision making  Better and effective decision can be made 23 11/10/2014
  24. 24. Group Decision Making  Group formation: 24 11/10/2014
  25. 25. Group Decision Making  Advantages  Synergy:  Ideas obtained from many minds  Sharing of information  Qualitative decision  Overcome difficult problems  Build leadership skill  Disadvantages:  Time consuming  Misunderstanding because of poor communications 25 11/10/2014
  26. 26. Improving the Decision Making  Some of the techniques employed to make the group decision making process more effective and decision making more efficient are:  Brainstorming  Nominal Group Technique (NGT)  Delphi Technique  Electronic Meeting 26 11/10/2014
  27. 27. Improving the Decision Making  Brainstorming:  Ideas are generated for specific problem through group creativity  Group of people consist from five to ten  It emphasizes on the generation of large number of ideas  This technique is used in advertising and some other fields 27 11/10/2014
  28. 28. Improving the Decision Making  Nominal Group Technique (NGT):  The nominal group technique restricts discussion or interpersonal communications during the decision making process  The group meets face-to-face  Each member presents one idea to the group  Discussion and ranking is done  High ranked idea is used for decision making 28 11/10/2014
  29. 29. Improving the Decision Making Delphi Techniques:  A Delphi technique is the modification of NGT  Each individual member independently writes down comments, suggestions and solution  All the comments are sent to a central location, where they are compiled  Finally decisions are made in written form through consensus 29 11/10/2014
  30. 30. Improving the Decision Making  Electronic Meeting  Electronic Meeting is one of the techniques that combine the NGT with sophisticated computer technology.  Each member communicate by writing comments by using computer terminals 30 11/10/2014
  31. 31. ANY QUESTIONS 31 11/10/2014
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