example of decision making steps by Dr.Ammara Omer Khakwani

1. ThompsonLumber Company
A profitable firm located in Portland Oregon
Step 1
 He identifies is whether to expand his product line?
 Manufacturing and marketing a new product , backyardstorage sheds
Step 2
He decides his alternatives
 A larger new plant to manufacture the storage sheds
 A small plant
 No plant at all
Common mistake
o Optimistic decisionmakers ignore bad outcomes.
o Pessimistic mangers may discount a favorable outcome.
Step 3
Any appropriate means of measuring benefit is acceptable (notevery decision
basedon money)
 Market for the storage sheds couldbe favorable(high Demand)
 Unfavorable for the storage sheds (low demand)
Step 4
 Thompson wants to maximize his profit, he canuse Profit to evaluate each
consequence.
With Favorable market
Net profit=$20,000 to his firm
Conditional value = $20,000(building a large factory + having goodmarket)
Unfavorable =180,000 netloss
Small plant
net profit=100,000 in a favorable market.
Loss =20,000 in either market

2. Decision table with conditional Values for Thompson Lumber
State of nature
Favorable Market Unfavorable Market
Alternatives ($) ($)
Constructa large plant 200,000 ~180,000
Constructa small plant 100,000 ~20,000
Do nothing 0 0
 Include all alternatives including do nothing .
Step 5-6
 Select and apply decision theory
 Model=Environment + amount of Risk and Uncertainty involved