Decision Making with Quantitative Tools

Quantitative techniques help a manager improve the overall quality of decision making. These techniques are most commonly used in the rational/logical decision model, but they can apply in any of the other models as well. Among the most common techniques are decision trees, payback analysis, and simulations.

Decision trees

A decision tree shows a complete picture of a potential decision and allows a manager to graph alternative decision paths. Decision trees are a useful way to analyze hiring, marketing, investments, equipment purchases, pricing, and similar decisions that involve a progression of smaller decisions. Generally, decision trees are used to evaluate decisions under conditions of risk.

The term decision tree comes from the graphic appearance of the technique that starts with the initial decision shown as the base. The various alternatives, based upon possible future environmental conditions, and the payoffs associated with each of the decisions branch from the trunk.

Decision trees force a manager to be explicit in analyzing conditions associated with future decisions and in determining the outcome of different alternatives. The decision tree is a flexible method. It can be used for many situations in which emphasis can be placed on sequential decisions, the probability of various conditions, or the highlighting of alternatives.

Payback analysis

Payback analysis comes in handy if a manager needs to decide whether to purchase a piece of equipment. Say, for example, that a manager is purchasing cars for a rental car company. Although a less‐expensive car may take less time to pay off, some clients may want more luxurious models. To decide which cars to purchase, a manager should consider some factors, such as the expected useful life of the car, its warranty and repair record, its cost of insurance, and, of course, the rental demand for the car. Based on the information gathered, a manager can then rank alternatives based on the cost of each car. A higher‐priced car may be more appropriate because of its longer life and customer rental demand. The strategy, of course, is for the manager to choose the alternative that has the quickest payback of the initial cost.

Many individuals use payback analysis when they decide whether they should continue their education. They determine how much courses will cost, how much salary they will earn as a result of each course completed and perhaps, degree earned, and how long it will take to recoup the investment. If the benefits outweigh the costs, the payback is worthwhile.

Simulations

Simulation is a broad term indicating any type of activity that attempts to imitate an existing system or situation in a simplified manner. Simulation is basically model building, in which the simulator is trying to gain understanding by replicating something and then manipulating it by adjusting the variables used to build the model.

Simulations have great potential in decision making. In the basic decision‐making steps, Step 4 is the evaluation of alternatives. If a manager could simulate alternatives and predict their outcomes at this point in the decision process, he or she would eliminate much of the guesswork from decision making.