Decision analyses

8/10/2019 Decision analyses

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1 2009 John Wiley & Sons, Ltd

By Paul Goodwin &

George Wright

ISBN: 978-0-470-71439-3

2009 John Wiley &

Sons, Ltd

www.wileyeurope.com/c

ollege/goodwin


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How people make decisions

involvingmultiple objectives

2009 John Wiley & Sons, Ltd


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Examples of decisions involving multiple

objectives

Choosing a holiday

liveliest nightlife

least crowded beaches

most sunshine

most modern hotels

lowest cost

Choosing a company to supply goods

best after-sales service

fastest delivery time

lowest prices

best reputation for reliability 2009 John Wiley & Sons, Ltd


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Bounded rationality

The limitations of the human mind meanthat people use approximate methods to

deal with most decision problems As a result they seek to identify

satisfactory, rather than optimal, courses ofaction.

These approximate methods, or rules ofthumb, are often referred to as heuristics



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Heuristics

These heuristics are often well adapted to

the structure of peoples knowledge of the

environment Quick ways of making decisions, which

people use, especially when time is limited,

have been referred to as fast and frugalheuristics



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Compensatory v non

compensatory strategies

Compensatory strategy -poor performanceon some attributes is compensated by goodperformance on others

- Not the case in a non-compensatory

strategy.

Compensatory strategies involve morecognitive effort.



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The Recognition heuristic

Used where people have to choose between

two options.

If one is recognized and the other is not, therecognized option is chosen

Works well in environments where quality

is associated with ease of recognition



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The Minimalist strategy

First apply recognition heuristic,

If neitheroption is recognized, simply guess

which is the best option. If both options are recognized, pick at random

one of the attributes of the two optionsandchoose best performer on this attribute

If both perform equally well on this attribute, pick

a 2ndattribute at random, and so on..



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Take the last

Same as minimalist heuristic except that people

use attribute that enabled them to choose last time

when they had a similar choice If both options are equally good on this attribute,

choose the attribute that worked the time before,

and so on.

If none of the previously used attributes works, a

random attribute will be tried.



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The Lexicographic strategy

Used where attributes can be ranked in order of

importance.

Involves identifying most important attribute andselecting option which is best on that attribute

(e.g. choose cheapest option)

In theres a tie on the most important attribute,

choose the option which performs best on the 2nd

most important attribute, and so on.



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The semi-lexicographic strategy

like the lexicographic strategy -except if

options have similar performance on an

attribute they are considered to be tied

It can lead to violation of transitivity

axiom.



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Example

If the price difference between brands isless than 50 cents choose the higher quality

product, otherwise choose the cheaperbrand.

Brand Price Quality

A $3.00 LowB $3.60 High

C $3.40 Medium



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A is preferred to B

B is preferred to C

But:

C is preferred to A



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Elimination by aspects (EBA)

The most important attribute is identified

and a performance cut-off point is

established. Any alternative falling below this point is

eliminated.

The process continues with 2nd mostimportant attribute, and so on..



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Example: Choosing a computer system

Aspect 1: 45m price limit

Aspect 2: Delivery time < 40 months

Aspect 3: Must have training course provided

System Price (m) Del time (mths) Course?A 60 55 No

B 32 35 No

C 44 59 Yes

D 70 68 Yes

E 25 67 Yes

F 44 38 Yes



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B 32 35 No

C 44 59 Yes

D 70 68 Yes

E 25 67 Yes

F 44 38 Yes



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B 32 35 No

C 44 59 Yes

D 70 68 Yes

E 25 67 Yes

F 44 38 Yes



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B 32 35 No

C 44 59 Yes

D 70 68 YesE 25 67 Yes

F 44 38 Yes



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Strengths & Limitations of EBA

Easy to apply

Involves no complicated computations

Easy to explain and justify to others.

Fails to ensure that the alternatives retained

are superior to those which are eliminated.

- this arises because the strategy is non-

compensatory.



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Sequential decision making:

Satisficing

Used where alternatives become availablesequentially

Search process stops when an alternative isfound which issatisfactoryin that itsattributes performances all exceedaspiration levels

These aspiration levels themselves adjustgradually in the light of alternatives alreadyexamined.



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Reason-based choice

Shafir et al:

when faced with the need to choose,

decision makers often seek and construct

reasons in order to resolve the conflict and

justify their choice to themselves and toothers.



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Some consequences of reason-based

choice Decisions framed as choose which to

select can lead to different choices to

those framed as choose which to reject

Irrelevant alternatives can influence choice

Attributes can be rejected if they haveweakly favorable or irrelevant attributes



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Example of reason-based choice

Candidate A Candidate B

Average written communication skills Excellent written

communication skills

Satisfactory absenteeism record Very good absenteeism

record

Average computing skills Excellent computer skills

Reasonable inter-personal skills Awkward when dealing

with othersAverage level of numeracy Poor level of numeracy

Average telephone skills Poor telephone skills



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Factors that affect how people make choices

Time available to make decision

Effort that a given strategy will involve

Decision makers knowledge about theenvironment

Importance of making an accurate decision

Whether or not the choice has to be justified to

others Desire to minimize conflict (e.g. conflicts between

the pros and cons of the alternatives).



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Decoy effects

Space for family &luggage

Image ofcar

Sports car withfree insurance

Saloon withfree insurance

Offer elsewhere of Salooncar without free insurance

makes this deal lookattractive

You choose the saloon!

You cant make

your mind up



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Phantom decoys

Cost of laptop ($)

Weight oflaptop (kg)

Cheap laptop

Expensivelaptop

Offer of price discounton cheap laptop makes

it look more attractive-even though the offeris no longer available

You cant make

your mind up

Pricediscounton cheap

laptop



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Choice by unique attributes

Destination A Destination B Destination C1

Good restaurants Lots of good Lots of good

nightspots nightspots

Most people chose A

Destination A Destination B Destination C2

Good restaurants Lots of good Good restaurants

nightspots

Most people chose B



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Emotion and choice

Sad moods prompt detailed analytic

thinking

Happy moodsless detailed analysis Affect heuristicfeeling generally

positive or negative about a decision option

influence ones perceptions of the risks orbenefits it might bring



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Partitioning the total cost of an item changes

preferences

Cost of a television

A: $199 + $30 shipping

B $229 including shipping

Option Aappeared to be

more attractive


Decision analyses

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