Decision Making Approaches
Rationality Using Decision Tree Example
Decision trees are one of the rational decision-making approaches used across many fields including marketing. They represent the decision, its points where to be made, and the probable results. It aims at establishing all the possible solutions and events as well as their potential impact in order to come up with the best decision offering the optimum utility. The following is an example of a decision tree on which investment to take (decision-making-confidence.com 2012).
My company is considering whether to invest in two of the investment tenders on the supply of commodities for a certain company. The two tenders are NM1 and NM2. The company has three options, to invest in NM1 or invests in NM2, or both. The tender prices are most likely to be as follows
NM1 cost for tendering == $20,000, and a supply cost of $11,000 if tender is won
NM2 costs for tendering == $17,000, and a supply cost of $6,000 if tender is won.
Cost of tendering both is $32,000, and supply cost of $ 14,000 after tender is won.
The possible prices for the tender are as follows in the table, together with their probability
| Options | Possible price $ | Probability of winning tender |
| NM1 | 150,000 | 0.30 |
| 120,000 | 0.75 | |
| NM2 | 120,000 | 0.45 |
| 105,000 | 0.87 | |
| Both NM1 and NM2 | 200,000 | 0.43 |
| 180,000 | 0.75 |
The decision tree will look as follows
0.30
2 150,000
120,000 0.75
0.45
1 3 120,000
105,000 0.87
0.15
4 200,000
4
180,000
0.75
From this decision tree, the best option to make is tendering for both tenders at a price of $180,000, since it has the highest benefits of $100,500. This is calculated by subtracting the costs of tendering and supply costs estimated if the tender is won, and finally multiplying by the probability to get what would be the best option to go by. Therefore, number 21 scored the highest, meaning that my company should go with that option (Ipson Marketing 2009).
Rationality using Payoff Matrix
The payoff matrix is an analysis tool summarizing advantages and disadvantages of a decision in a tabular form; it lists all the payoffs, both negative and positive under all the possible combinations that can generate the intended goal. The matrix is used for comparing the best benefit for two competitors who are competing for the same resources. When one wins, the other one loses. An example of a payoff matrix is as follows (Russell 270).
My company PLC is in a competition with company XYZ, competing for the same market, where there is a 100,000 units to be sold to a client. My company and XYZ are to compete for this amount of money by bidding. One can either bid at $0, $1, $2. If we bid at the same price, we split the amount into two. If each bids with different price, one will lose to the other. This can be represented in a payoff matrix as follows
Payoff Matrix
| Column Player Company XYZ | ||||
| Row player
PLC |
$0 | $1 | $2 | |
| $0 | 50,000/50,000 | 0/99,000 | 0/98,000 | |
| $1 | 99,000/0 | 49,000/49,000 | -1,000/98,000 | |
| $2 | 99,000/0 | 98,00/-1,000 | 48,000/48,000 | |
From the payoff matrix, it is clear that if we bid at $2 while XYZ bids at the same, we shall both have equal share of selling to the client. At $2, there would be more benefits for both companies since each will earn $96,000 each, while at $1, one company will earn nothing while the other will take $99,000. Therefore, the company should aim to bid at $2 where it will supply less at a higher price.
Work cited
Decision-making-confidence.com. What Are The Most Popular Decision Making Models? decision-making confidence.com, 2012. Web. May 29, 2012.
Ipson Marketing. Decision Tree. ipsos.com, 2009. Web. May 29, 2012.
Russell, W. David. The Boxes Methodology: Black Box Dynamic Control. New York, N.Y: Springer, 2012. Print.
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