Negociación

Harvard Business School

9-894-004
Rev. December 4, 1997

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Decision Analysis

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Why do managers usually find making decisions difficult? First, uncertainty is
inherent in most important decisions. A product manager, for example, must decide whether
to market a new product, even though she is uncertain of production costs, consumer
receptivity, and how the competition mightreact. A second reason is that decision makers
must balance many conflicting objectives. A division manager may decide to invest in a new
product that has the potential to be a blockbuster in ten years, even if the division’s morale
and short term profitability suffers. Third, the large number of alternatives a manager must
evaluate often serves to confuse and even paralyze the decision maker.Finally, a manager
often does not even know the full set of alternatives from which she must choose.

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In short, it often becomes too difficult to make a decision based only on intuition:
formal analysis may be necessary. Decision analysis is a logical and systematic approach for
analyzing decision problems. It takes a “divide and conquer” approach to decision making,
breaking down theprocess into a number of steps (summarized in Figure 1):
1. Decision structuring: Identify

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a. the set of alternatives from which to choose;

b. the set of critical uncertainties that affect the outcomes of the decisions;
c. criteria for choosing among the competing alternatives.

We represent alternatives and uncertainties in chronological order using a decision
tree.
2. Assessmentand information gathering: Collect relevant information,

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a. assessing the likelihood of the various uncertain events;

b. assigning values to the various consequences of the decision problem.
George Wu prepared this note as a basis for class discussion.

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894-004

Decision Analysis

3. Evaluation of thedecision problem: Analyze the information provided in the first two
steps to determine which alternatives to undertake.
4. Sensitivity analysis: Determine if the decision is sensitive to changes in
probabilities, valuation of outcomes, or other assumptions you have made.

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Decision
Traps

Assessment
Information
and
Gathering
Information
Gathering

Information
Evaluation ofGathering
Decision
Problem

Sensitivity
Analysis

Decision
Traps

Decision
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Decision
Traps

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Decision
Structuring

Figure 1

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Each step of this four-stage process yields insights into the decision problem. If the
insights gained at any stage are sufficient to allow you to make a decision, then there is no
need to proceed further. On the other hand, theprocess is often iterative: you might return to
a previous step in the process if an insight leads you to consider another alternative or
question an assumption.

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Many believe, falsely, that decision analysis is merely a set of mechanical techniques
that spits out “the best option” if applied properly. This characterization sells short both
decision analysis and the manager as decisionmaker. While it is true that it is easy to use the
techniques we describe here incorrectly, sound decision making requires much more than a
technical command of decision analysis. The practice of decision making is as much an art as
a science. We emphasize throughout this note that a wise decision requires judgment,
creativity, as well as technical proficiency. Furthermore, following these four...