Respond to the following questions from chapter 1 on pp12-13. Use this document to respond to the following question using MS Word. Type your responses below each question shown below and use as much space as you need for your response.
1.2 Explain how modeling is used in decision analysis. What is meant by the term “requisite decision model”? Ans: Modeling is used in decision analysis in several ways. Models facilitate gaining insights of a decision problem that may not be apparent or obvious on the surface. For example, influence diagrams and decision trees are used to represent the decision problem. Hierarchical and network models are used to understand the relationships among different aspects or objectives. Utility functions are used to model the way in which decision-makers value different outcomes and trade off competing objectives. A requisite decision model is a model that can be considered requisite only when no new intuitions emerge about the problem. In simple words, a requisite decision model is a model whose form and content are sufficient to solve a particular problem. Everything required to solve the problem is represented in the model or can be simulated by it (Phillips, 1987, p.37).
1.3 What role do subjective judgments play in decision analysis? Ans: Subjective judgments are important ingredients in decision analysis. Discovering and developing these judgments involves thinking hard and systematically about important aspects of a decision, which forms an essential part of decision analysis. However, it should also be kept in mind that personal insights might be limited and misleading as human beings are imperfect information processors. Thus, it is essential that personal judgments are taken into consideration, and at the same time human cognitive limitations are understood for improved decisions.
1.4 At a dinner party, an acquaintance asks whether you have read anything interesting lately, and you mention that you have begun to read a text on decision analysis. Your friend asks what decision analysis is and why anyone would want to read a book about it, let alone write one! How would you answer? Ans: Decision analysis consists of a framework and a tool kit for dealing with difficult decisions. It is used to help a decision maker think systematically about complex problems and to improve the quality of resulting decisions. Decision analysis offers guidance to normal people working on hard decisions using fundamental principles such as tools to understand the structure of the problem, uncertainties involved and the trade-offs inherent in alternative outcomes.
1.5 Your friend in Question 1.4, upon hearing your answer, is delighted! “This is marvelous,” she exclaims. “I have this very difficult choice to make at work. I’ll tell you the facts, and you can tell me what I should do!” Explain to her why you cannot do the analysis for her. Ans: Although decision analysis provides guidance for systematic thinking in hard decisions, it does not mean that it provides an alternative that must be blindly accepted. The decision maker should understand the problem thoroughly. Decision analysis does not relieve the decision maker from the obligations in facing the problem, or replace his or her intuition. Instead of providing solutions, it merely augments the decision maker’s thought process by providing insights into the objectives, trade-offs and uncertainties. Thus, the friend must go through the process of decision analysis to understand the problem which will help in better decisions.
1.10 “Socially responsible investing” first became fashionable in the 1980s. Such investing involves consideration of the kinds of businesses that a firm
engages in and selection of investments that are as consistent as possible with the investor’s sense of ethical and moral business activity. What trade-offs must the socially responsible investor makes? How are these trade-offs more complicated than those that we normally consider in making investment decisions? Recall, from ISEN 667 the financial objective of the firm (maximize the future wealth of the owners of the firm.) Ans: The key question here is: can good environmental performance can be associated with good financial performance? Since socially responsible investing firms do not invest in a broad mix of stocks, one will expect their performance to lag behind other firms in the market.
Expenses are higher and management is time-consuming as socially conscious portfolios require increased managerial oversight and research. However, the market performance of these firms tends to be stable in the long run as they do not invest in volatile ventures. Thus, the decision makers must consider the short-term as well as the long terms effects of the decision in their analysis. The trade-offs are more complicated than those that we normally consider in making investment decisions. This is because financial performances are well-defined, whereas there are no clear definitions for environmental performance indicators. Firms thus, find it difficult to measure their financial performance relative to environmental performance.
1.11 Many decisions are simple, preprogrammed, or already solved. For example, retailers do not have to think long to decide how to deal with a new customer. Some operations-research models provide “ready-made” decisions, such as finding an optimal inventory level using an order-quantity formula or determining an optimal production mix using linear programming. Contrast these decisions with unstructured or strategic decisions, such as choosing a career or locating a nuclear power plant.
Ans: Structured decisions are programmable, preplanned decisions which are made under the established situations that are fully understood. There are limited trade-offs and objectives often are not conflicting with other secondary objectives. Unstructured or strategic decisions are often made under situations that are unclear or uncertain. There are multiple trade-offs and objectives to consider which are often conflicting in nature. There is no one particular solution for a strategic decision. Multiple alternatives must be evaluated and the decision chosen might not necessarily produce the best result.
What kinds of decisions are appropriate for a decision-analysis approach? Ans: Unstructured decisions are appropriate for a decision-analysis approach as there is no need for decision analysis when the decision is simple or programmable. Complex, hard decisions require systematic thinking, understanding of the problem and awareness of the uncertainties and trades-offs, and thus, are appropriate for decision-analysis approach.
Refer to the DuPont and Chlorofluorocarbons case on page 15 and respond to the following questions.
1. What issues would you take into account and why?
I would take into account the following issues:
(i) Stakeholders’ needs: Stakeholders are of paramount importance. The conflicting issue is that without pleasing customers it is difficult to maximize shareholder returns, while without regulatory support shareholder returns cannot be assured. (ii) Accountability and public perception: Should the firm accept the scientific evidence and make it public? What will be the public reaction? (iii) Environmental responsibility: A complete ban on CFCs would cause severe economic and health problems because of the loss of refrigeration and air-conditioning. The firm is responsible for developing a substitute before a complete ban is implemented.
2. What major sources of uncertainty do you face?
(i) Uncertainty of Science: The scientific evidence that CFCs have a detrimental effect on the ozone layer might suffer from certain setbacks. I would assign scientists to focus more on the connection between CFCs and ozone layer. (ii) Development of substitute: It is not certain that the substitute developed for CFCs would be as marketable as CFCs, and would be as efficient as CFCs. This can have direct effects on the performance of the firm. Also, it is uncertain if they will also have a harmful effect on the ozone. (iii) International cooperation: Development of the substitute and subsequent ban of CFCs requires international cooperation which is uncertain.
3. What corporate objectives would be important for you to consider? Do you think that DuPont’s corporate objectives and the way the company views the problem might have evolved since the mid-1970s when CFCs were just beginning to become an issue? Ans: Taking the course of action that maximizes the firm’s profit would be the most important corporate objective of the firm. However, there is also an environmental aspect involved. Thus, we should search for solutions where the needs of both can be satisfied simultaneously. I think the way the company views the problem might have evolved since the mid-1970s from being profit-oriented to a more environmentally sensitive perspective.
Robert. T. Clemen , Terrence Reilly, “Making Hard Decisions with Decision Tools”, Duxbury Press; 1 edition, Jun 2000