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Topic-3 Decision Theory

Decision Making in Different MGT Levels. 1. Strategic Decisions: Top Management (CEO's). A few but very important decisions (e.g., enter a new market/build a new facility).2. Tactical Decisions: Middle (Departmental) Management. A number of decisions directing departmental actions (e.g., production

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Topic-3 Decision Theory

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    1. Topic-3 Decision Theory

    2. Decision Making in Different MGT Levels 1. Strategic Decisions: Top Management (CEO's). A few but very important decisions (e.g., enter a new market/build a new facility). 2. Tactical Decisions: Middle (Departmental) Management. A number of decisions directing departmental actions (e.g., production plan/new marketing program). 3. Operational Decisions: Low (Line) Management. A great number of day-to-day routine decisions to execute higher level plans (job dispatching/order processing/...). Three level MGT decisions must be consistent with and supportive of to achieve desired organizational objectives and performance. There are significant differences in the nature, importance, impact, information needs, .... of decisions for different MGT levels of decision-making.

    3. Strategic vs. Tactical Decision

    4. Decision-Making under Different Conditions Example: You will graduate by the end of this semester, and must make decision for your future right now. You have three alternatives for your future: 1. Go to work with your B.S degree (Work), 2. Apply for study in Law school (to be a Lawyer), or 3. Apply for study in Medicine school (be a Doctor). You need more information to make decision. Situation-1: If You know with certainty 1) Work -- $20,000/year (average) 2) Lawyer -- $60,000/year (after 2 years) 3) Doctor -- $120,000/year (after 6 years) Situation-2: If You know the chances of probability 1) Work -- a)$20,000/year (80%) b)$15,000/year (20%) 2) Lawyer - a)$60,000/year (30%) b)$70,000/year (70%) 3) Doctor - a)$120,000/year (60%) b)$80,000/year (40%) Situation-3: If You don't know the chances of probability 1) Work -- a)$20,000/year (?%) b)$15,000/year (?%) 2) Lawyer - a)$60,000/year (?%) b)$70,000/year (?%) 3) Doctor - a)$120,000/year (?%) b)$80,000/year (?%)

    5. Three Decision-Making Conditions Decision-Making under Certainty: knowing outcomes with certainty, i.e., only one outcome associated with a decision (relatively easy). [Deterministic Problem] Decision-Making under Risk: there are a limited number of outcomes associated with a decision, but the probability of the occurrence of each outcome is known (moderate difficult). [Stochastic Problem] Decision-Making under Uncertainty: there are more than one outcomes with a decision, and the probability of occurrence of each outcome is unknown (very difficult). [Uncertainty Problem] Most MS models are developed for Decision-Making under Certainty (or under Risk) problems. Very few are designed for Decision-Making under Uncertainty problems.

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