What Is Decision Analysis?

Education & Career Trends: November 6, 2022

Curated by the Knowledge Team of  ICS Career GPS

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Content Credit:

• Article published on in.indeed.com. Original article link.

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Businesses take various strategies to find an optimal solution to a problem. One such strategy is to conduct a decision analysis (DA) that helps them find the best possible outcome from a set of potential outcomes and make an informed decision.

Decision analysis is the process of taking a systematic, structured and visual approach to finding the most optimal solution. It involves finding all potential options and choosing one that either minimises or maximises the objective function.

To make an effective decision, you require:

• Information related to the decision
• Viable options for a specified problem
• Quantitative data to make a data-driven decision
• Visual tools to better understand the workflow

How To Make An Effective Decision:

1. Identify the problem

• Identifying the problem is the first step in making an effective decision.
• You can do this by collecting the required information and talking to stakeholders.
• For example, a manager observes that a company’s sales are declining over a period. The manager identifies the problem may be because of the quality of customer services, competitor’s pricing and lack of innovation in the product.

2. Research the available options

• After identifying the problem, start looking at the potential solutions or options to solve the problem.
• This requires conducting thorough research and collaboration with other experts.
• This provides data you can use to assess the potential outcomes of an option and to build a decision model.

3. Create a framework

• After researching all workable options, it is essential to evaluate their outcomes.
• You can do this by introducing key performance indicators (KPIs) that measure the progress towards the intended goal.
• The criteria of measurement may either be qualitative or quantitative.

4. Develop a decision model

This step involves integrating the framework with a decision model to visualise the potential solutions and their outcomes. You can use the following models:

Decision trees–

• Decision trees are complex flowcharts that display multiple pathways for decisions and outcomes.
• They comprise chance, decision and end nodes, where chance nodes contain the probability of results, the decision nodes are points where the flow branches into several other options and the end nodes show the ultimate outcome of a particular decision path.

Influence diagrams–

Influence diagrams are visual representations of a decision problem. You can use this model to visualise the major factors that influence a decision, the impact of one factor on others and how various outcomes relate to one another. Follow these steps to draw an influence diagram:

• Start the tree. The first node contains the primary question or factor related to a decision. You can use a rectangle for this.
• Add various factors. Add a series of secondary factors, sub-decisions and chances that constitute a decision. You can use various shapes, such as circles for uncertainty and parallelograms for values.
• Add connectors. Add connectors to each of the shapes to showcase the flow of influence in the diagram. It is necessary that each box or shape has at least one connection.

5. Find the expected value

• The expected value (EV) provides the weighted average of each outcome in the decision-making process.
• This requires assigning numerical values to various outcomes.
• After assigning values to the options, multiply them by each outcome’s probability.
• This gives the partial value of each outcome. Add all the partial values to obtain the expected value.
• After this, compare all the values and choose an outcome with the maximum value. Review the formula:

EV = ∑ (probability of an event x value)

Why Is This Analysis Important?

Decision Analysis is important for the following reasons:

• Helps make complex decisions
• Provides clarity in the decision-making process
• Helps justify the decision to the management
• Enables individuals and team members to visualise the decision-making process

Challenges To Decision Analysis:

The following factors are challenges to the decision-making process:

• Uncertainty: There are situations where there may not be enough data available to make a decision. This makes it difficult for a decision-maker to evaluate the consequences of potential outcomes.
• Bias: Biases and personal views may influence the decision-making process. This can cause systematic errors and result in misjudging threats and risks.
• Time constraint: There are situations when decision-makers require making immediate decisions. This does not allow them to collect enough data to perform the analysis.
• Rationale: Decision-makers may look for solutions that can benefit them instead of ones that are actually optimal, also known as bounded rationality.

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Have you checked out yesterday’s blog yet?

Habits of People Who Unlock Their Brain’s Full Potential

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(Disclaimer: The opinions expressed in the article mentioned above are those of the author(s). They do not purport to reflect the opinions or views of ICS Career GPS or its staff.)

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(Disclaimer: The opinions expressed in the article mentioned above are those of the author(s). They do not purport to reflect the opinions or views of ICS Career GPS or its staff.)

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