Decision-making techniques can be classified in terms of decision-making in situations of certainty, uncertainty and risk. In certainty where the outcomes are certain, no decision-making tool is required as the outcomes are certain to occur and hence anyone can take the correct decision (the obvious one). However, decision-making under risk means that the probability values associated with the success and failure of outcomes is known but the outcomes are by no means certain. In these kinds of situations, one can use the decision tree method to take decisions.

Decision-making under Risk

Decision tree

The decision tree method uses an oriented tree or the direction associated tree to represent the decision-making process. The nodes represent points in time, where the decision-maker takes one or the other decision and takes a path or is faced with a state of nature or the decision process terminates. Directed paths emanate out of nodes. These are called branches. They represent the decision branches for possible decisions under a state of nature. Under each branch the probability associated with the success and failure of the event is noted. Decision trees are helpful when probabilities are available for each event and are used to determine optimal decisions. The decision-maker has to first prepare the decision tree and then from the terminal nodes calculate the expected payoff for each path of decision-making by back calculating. The path that gives the maximum payoff is the optimal decision path.

A is the starting node from where the decision-making starts and T are the terminal nodes that represent the possible terminal stages of decision-making. The lines connecting nodes are called branches. As is evident, the branches represent decision paths and probability of success and failure are associated with each branch.

Decision-making under uncertainty means that decision-making is done when the probability about the success or failure of events is not known, unlike in decision-making under risk, where the probability values of success or failure is known. In such circumstances when the probability of occurrence of the states of nature are not known we use.

Decision-making under Uncertainty

Laplace criteria

In this technique equal probabilities are assigned to the possible payoffs and then selection is based on the maximum expected payoff.

For example, if a farmer does not know the probability of high or low rainfall but wants to plant a crop of wheat, rice or bajra for which the expected payoffs are as given below, then Laplace criteria is used in this case as,

Since wheat gives maximum expected payoff the farmer selects wheat.

This method has been modified by using regret matrix and more refined methods are available like Hurwicz criteria and savage method.

Qualitative tools of decision-making

Some of the qualitative tools of decision-making are:

1. Pareto analysis
2. Force field analysis
3. Six thinking hats technique
4. Paired Comparison Analysis
5. Plus minus implication

Bounded rationality is a term first coined by Herbert Simon. Simon challenged the concept of a rational man in classical and neoclassical economic theories and argued that the rationality of man is bounded by certain limitations. He opined that even though rational thinking, deductive reasoning and logic are good for solving theoretical problems.

They are not so good for practical problem solving where the behavior of the decision-maker and his intellect, information about the problem at hand and the time to solve such a problem may create a scenario where the decision-making may happen under a rationality that is bounded by certain conditions. He argued that in real situations people take decisions on the basis of heuristics rather than rule based optimization methods. He argued that decision-making is bounded by the following limitations.

Information

Lack of information or incomplete information leads to sub optimal decisions as the decision-maker is not fully aware of the pros and cons of a decision due to lack of information. Hence, lack of information creates a boundary and hinders the rational choice of the decision-maker.

Intellectual Ability/Cognitive Ability

The problem at hand may be so complex that the decision-maker may not be able to comprehend the true nature and complexity of the problem, leading to a sub optimal decision. If the problem would have been comprehensible, the decision-maker would have made a rational choice. This creates a boundary on the otherwise rational choice of the decision-maker.

Lack of Time to take Decisions

The lack of time may also lead to suboptimal decisions as in this case the decision-maker does not have time to evaluate all the choices and come to a rational choice. On the contrary, lack of time leads to improper and sub optimal decisions, as one does not have the required time to process the information available.

Decisions are of varying complexity. Some decisions are routine, simple and easy to take Knowledge about such decisions is very well known. The outcomes of each alternative of such decisions are well known and certain.

No surprises, for example, let us assume that an operator at the quality checking department checks a product based on fixed specifications. If the product fails to meet any of the specifications, it is rejected, else accepted. In such a situation, the role of the operator is clearly laid out, the decision rules are well laid out and the best choices to take are known in advance. The information on which the decision-making is based comes from within the organization. This is an example of simple operational decision-making. Not all decisions however, are so simple and structured. In unstructured decisions, the process outcomes of each stage of the decision-making process are not well known. Information about the decision-making process is not known. These decisions are complex. Normally, strategic decisions are of this type.

The central nervous system (CNS) of our body consists of the brain and the spinal cord. Together they control most our basic functions like movements, speech, cognition, vision, etc. The human brain is a very complex system. It is made up of nerve cells called neurons. There are an estimated 50-100 billion neurons are present in an average human brain which weighs approximately about 1.5 kg. The brain is considered to consist of three main constituents:

1. The forebrain,
2. The hindbrain; and
3. The limbic system.

The Forebrain

The cerebrum or cortex is the largest part of the brain and is considered to be responsible for functions like thought and action. The cerebral cortex is divided into four sections or lobes.

1. The frontal lobe-responsible for logical reasoning, emotions, planning, some types of movement, part of speech, empathy and altruism, problem solving judgment and impulse control. It is fully developed when we are young adults. It also manages our higher emotions.
2. Parietal lobe-responsible for some types of movement, recognition, orientation, perception of stimuli like pain, touch, speech and cognition.
3. Occipital lobe-responsible for vision.
4. Temporal lobe-responsible for perception and recognition of auditory stimuli, memory and speech.

The cerebral cortex is symmetric with two parts called the left and right hemispheres. Both the hemispheres are connected by a bundle of cells called the corpus callosum. The cerebral cortex is folded such that it allows a large surface area to fit within the skull. In terms of size, it is about two-thirds of the human brain. This is the most advanced region of the brain only found in advanced mammals and it gives us the intellectual superiority. The right hemisphere is considered to be responsible for artistic, spatial and musical qualities and the left hemisphere is responsible for rational and verbal qualities.

The Hindbrain

This is the primitive part of the brain and is responsible for basic instincts of survival, mating, dominance, etc. The hindbrain consists of:

1. The spinal cord-is a set of nerve cells which runs vertically through our vertebral column. It is responsible for transmitting the instructions of the brain to other body parts.
2. The medulla oblongata-is responsible for involuntary actions like respiration, digestion and heart rate. It also acts as a relay station.
3. The pons-It is responsible for arousal and sleep.
4. The cerebellum-It is responsible for regulation and coordination of movement, posture and balance.

The Limbic System

The limbic system is buried deep within the cerebrum. It is also called the emotional brain as emotions and memory are associated with this structure. It is also associated with unconscious value judgments, creativity and spontaneity.

It consists of:

1. The amygdale-it is responsible for classifying emotionally charged memories. It is responsible for the emotion fear and is considered to trigger responses such as sweaty palms; increased heartbeat and stress hormone release.
2. The hippocampus-this structure is primarily responsible for memory.
3. The hypothalamus-it is responsible for some of the involuntary actions of our body.
4. The thalamus-it is responsible for relay of nerve signals.

As is clear from the structure of the brain, that some decisions mostly falling under the category of rational, logical and analytical nature are processed in the forebrain frontal lobe, whereas some decisions based on emotional considerations may use the limbic system. Thus, clearly, different areas of the brain are activated for different types of decision-making.

In earlier times, the main levels of business capability and change were strategy, structure, processes and people but in today’s time another level has been added to the four that already exist. This invisible asset works as a key resource for the organization.

In today’s competitive business environment the key differentiator is the way organizations leverage the power of information. Material resources, human resources, monetary resources can only be utilized to the full if information is managed. Business organizations have therefore started looking at MIS beyond just as a support function. Information is now being used to provide insights to decision-makers so that better and informed decisions can be taken. Entire subject areas like data mining, data warehousing and business intelligence have been developed on this premise of information as a resource. More and more organizations are now digging into their own data to make predictions about the future. Decision-making techniques have vastly evolved as well and rely more on analytics for support rather than just judgment and experience as was the case in the past. Today the modern manager has the luxury of scenario analysis, what if analysis, business dashboard, etc., to visualize the effects of his decisions on the various simulated scenarios. Scenarios can now be built so that managers not only have a single plan of action but multiple plans to suit multiple other likely scenarios. This has helped to reduce uncertainty and therefore improve the bottom line.

Some important concepts need to be defined here before we move forward. Concepts like information, management, information systems and information technology are used often to describe information related concepts and issues used in an organization. They are defined below:

Information Management is a business and process driven concept in which the focus is on leveraging information for using it to take decisions, on the quality of such information that is provided and the integrity of the information. it is the scientific organization of data (by capturing storing, analyzing, retrieving and disseminating) and information for use within an organization.

Information system it is systems based concept that focuses on transactions, events and data. It is the systematic process involving information gathering, storing, processing, retrieving and disseminating, which ensures repeatability of good quality information’ supply within an organization.

Information technology is the broad set of technologies/technology disciplines like computer science and engineering, telecommunication, electronics, etc., which aid in information management.

Information plays a vital role in decision-making. Even to take very simple decisions, we need information. To understand the role played by information in decision-making, we have to understand how decisions are taken. Decision-making is basically a process that includes the following stages:

Information is thus, very important to take decisions.

Imagine a simple decision like the one a driver (say) makes when he puts on the brakes to stop a speeding vehicle when he sees a child crossing the road (in middle of the road). The driver decides on braking based on a lot of information processing that happens in his brain. At every stage of the decision-making he uses information that he captures visually. All decisions are like this.

First we get information about a problem, format it into a structure and then factor in the information about the context in which the problem has occurred. Like in the above case instead of the child being at the middle of the road and crossing it, the driver would have seen the child about to cross over with a few steps only he would probably not have braked to stop but would have slowed down, as he would have calculated that by the time the vehicle reaches the crossing stage, the child would already have passed. So if the problem was structured as ‘how to not hit the child crossing the road?’, and if the child was at the middle of the road, the driver would have braked but had the child been at (say) at ninety per cent completion level of crossing the road, the driver would have only slowed down and not braked to stop. Therefore, we see that the context has a major role in the decision-making and information is required both about the problem and about the context in which the problem occurred. The next stage for the decision maker would be to generate alternatives. In the driver’s case such possible alternatives would be

1. to stop by braking
2. to slow down
3. to take a sharp turn towards left or right to avoid the child
4. press the horn so that the child crosses the road fast
5. To drive the vehicle on to the footpath and out of the road to avoid collision, etc.

So the decision-maker generates these possible solutions to the problem at hand based on information about such possible solutions. Each of the alternatives represents a possible solution, which one can generate if one has information about them. In the case of the driver, obviously, he needs knowledge and information to generate these alternatives, i.e., to stop by breaking the driver would need to know that braking stops the vehicle. If he is unaware of this crucial information he would not have been able to generate this alternative. So information is vital for generation of alternatives. Now for the choice part also, the decision maker needs to have information about the suitability of each alternative to decide, which the ‘best’ is. In our example, the driver calculates the ‘payoff’ for each alternative based on his calculation of the outcome that again is based on information. He selects the ‘best’ option that solves the problem. Thus, we can see that information is the key to the decision making process, without information and the right kind of information decision-making is not possible. Information plays a crucial role in every stage of the decision-making process.

Decision-making is the most important task of managers in an organization. Therefore, to enable managers to take good quality decisions, it is very important to provide them with the right kind of information. Information management in organizations therefore assumes a special significance. In most organizations, business or otherwise, a systematic systems based method is used for information management. Systems based information management works best under a computerized environment and such computer based information management system is normally called ‘Management Information Systems (MIS)’, which provides the service of information supply to the managers enabling them to take informed decisions. It may be worthwhile to mention here that MIS does not necessitates the use of computer based technology, but the use of computers and information technology makes MIS suitable for business organizations in a competitive environment as it helps to provide timely and accurate information. MIS done manually, without the help of computers is neither timely nor accurate.