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Decision Making

Last updated Dec 7, 2022 Edit

Opportunity Cost: The cost of missing out on the next best alternative. The benefits that could have been gained by making a different decision.

  1. Distinguish between scientific decision-making and intuition/hunch based decision-making.
  1. Not key stages in the decision-making process:
  1. Scientific decision-making is a lot more trustworthy and reliable. It can be backed up with evidence and data that supports or opposes a decision. Scientific decision-making also makes use of a wider set of information than a hunch. Hunches may be based on 1 or 2 things, whereas a scientific decision may be based upon hundreds or even thousands of data points.
  2. Intuition/hunch based decisions can be useful for when action is required quickly. If you don’t have the time or resources to make a scientific decision, then intuition is your best chance.
  3. In any decision, you will need to account for all possible risks and uncertainty that may come from a decision, and weigh it up against the possible rewards. If you do this correctly, you are unlikely to make any decisions where you lose more than you can afford.
  4. Opportunity cost is the benefits that have been given up by making a particular decision over another.
  5. Opportunity cost helps you to see what your resources are going towards, and what you’re getting back. It allows for a more analytical overview of decision-making.

# Decision Trees

Expected Value: The financial value of an outcome calculated by multiplying the estimated financial effect by its probability.


High sales + low sales = Total Expected Value

Net gain = Total Expected Value - Cost


1.4m cost

=> 40% 2.5m payoff => 60% 800k payoff

0.4 * 2500000 = 1000000 0.6 * 800000 = 480000

1000000 + 480000 = 1480000 (1.48m) 1.48 - 1.4 = 0.08m net gain

(B): 0.5m cost

=> 30% 1m payoff => 70% 0.5m payoff

0.3 * 1000000 = 300000 0.7 * 500000 = 350000

300000 + 350000 = 650000 (0.65m) 0.65 - 0.5 = 0.15m net gain (C):

Do nothing. Not optimal.

Option B is the most profitable option.

== {Express in a single unit—everything in millions would have been good}

# Advantages of using decision trees

# Disadvantages of using decision trees

Quality of data inputted is equal to the quality of the data outputted.