Decision Analysis (Part 1)

Introduction

There are times in life when you will have complex decisions to make and the only way out is to know what strategy or chain of actions can lead you to your desired objectives. Your strategy is your best alternative to reach your desired goals, that is what your strategy is about.  A decision strategy is a series of steps that you take. How do you formulate a decision strategy? You formulate it by scoping the entirety of the decision-making or decision problem. You have to analyze the decision problems, what are the contingencies? You cannot leave anything to chance.

In the corporate world, we are usually confronted with decision-making or decision problems. Before companies set up their financial model, it is advisable that the first thing you need to do is to scope the decision problem. What are the different options or decision alternatives? You cannot just lock yourself into one decision alternative or frame, if you do this then you are setting up yourself for failure because in life almost everything is random or uncertain.

We are operating in an uncertain, ambiguous, complex, and volatile world. For example, A is up today and tomorrow it is down, and B can be up today and tomorrow it is down hence, you cannot predict what the outcome will be which makes it difficult for you to take a particular cause of action. Before you take any decision in the corporate environment or even in your personal life you have to be very careful because most decisions we take involve opportunity cost and direct cost. For instance, if you decided to acquire an MBA that requires you to resign from your current job, you will need to consider what are the prospects that you will get a better job after the MBA program.

Furthermore, you will ask yourself will I get a job that will repay all the cost you have incurred in trying to acquire the MBA? These are examples of decision problems we are confronted with every day in our personal lives. In the corporate world, it might involve a project that requires a huge cost and there is a risk that you make money, a risk that you do not make money, and a risk that you do not even break even, you have to decide which option to select. The business world is a business of risk. How do you scope your risks, you need to quantify the risk, and to quantify the risk you have to put some probability. For instance, what is the probability that the risk will crystalize? Crystallization of risk in simple terms means that will the risk come through and you need a very strong knowledge of probability. The knowledge has wide-ranging applications such as in Data Analytics, Forecasting just to mention a few.

In conclusion, Where everything is okay then we can make decisions without probability. However, in the corporate world and in our personal lives risks are always attached to our decision-making. Decision-making presupposes that there are uncertainties such as there are some things we do not know or we are not sure of. Every decision-making involves some level of uncertainty and some level of risk.

To be continued…

#MBA 21