1. 1 Structure and Elements of Decision Making Session 2 Decision Making and Risk Partha Krishnamurthy

2. 2 Representing Decisions  Are there ways of structuring and representing decisions?  Why should we structure decisions?  How can we structure decisions?  Decision trees. Help structure the decision Know what is known and unknown Helps understand disagreements. Helps grasp various facets of a decision. Reports that say that something hasn't happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns … it is the latter category that tend to be the difficult ones.

3. 3 Structuring Decisions Option A Option B Outcome A1 Outcome A2 Outcome B1 Outcome B2 Payoff A1 Payoff A2 Payoff B1 Payoff B2 p(A1) p(A2) p(B1) p(B2)

4. 4 Understanding Decision Options Option A Option B Outcome A1 Outcome A2 Outcome B1 Outcome B2 Payoff Portfolio A1 Payoff Portfolio A2 Payoff Portfolio B1 Payoff Portfolio B2 p(A1) p(A2) p(B1) p(B2) Option Portfolio Known Options Unknown Options Deferred Decision

5. 5 Understanding Outcomes of Options Option A Option B Outcome A1 Outcome A2 Outcome B1 Outcome B2 Payoff Portfolio A1 Payoff Portfolio A2 Payoff Portfolio B1 Payoff Portfolio B2 p(A1) p(A2) p(B1) p(B2) Outcome Portfolio Known Outcomes Unknown Outcomes Outcome probabilities Distribution

6. 6 Understanding Payoffs from Outcomes Option A Option B Outcome A1 Outcome A2 Outcome B1 Outcome B2 Payoff Portfolio A1 Payoff Portfolio A2 Payoff Portfolio B1 Payoff Portfolio B2 p(A1) p(A2) p(B1) p(B2) Payoff Portfolio Simple Payoffs $ metric Complex Payoffs Revenues Costs Learning Turnover Morale Comp. Response Future Options Tech Market Facilities Integrating payoffs to determine overall utility

7. 7 Understanding Decision Forks Option A Option B Outcome A1 Outcome A2 Outcome B1 Outcome B2 Payoff Portfolio A1 Payoff Portfolio A2 Payoff Portfolio B1 Payoff Portfolio B2 p(A1) p(A2) p(B1) p(B2) Choose or Reject Decision Task Choosing or Rejecting Should have no implication for the decision under rationality assumptions

8. 8 Decision Making Structure - Recap Option A Option B Outcome A1 Outcome A2 Outcome B1 Outcome B2 Payoff Portfolio A1 Payoff Portfolio A2 Payoff Portfolio B1 Payoff Portfolio B2 p(A1) p(A2) p(B1) p(B2) Payoff Portfolio Simple Payoffs $ metric Complex Payoffs Revenues Costs Learning Turnover Morale Comp. Response Future Options Tech Market Facilities Integrating payoffs to determine overall utility Outcome Portfolio Known Outcomes Unknown Outcomes Outcome probabilities Distribution Option Portfolio Known Options Unknown Options Deferred Decision Decision Task Choosing or Rejecting Should have no implication for the decision under rationality assumptions Choose or Reject

9. 9 Summary and Anatomy of A Decision  Recognize decision point - the hallmark of leadership.  Identify decision task.  Be aware of the options  Know the outcomes of each of the options.  Understand the probability associated with outcomes.  Recognize the portfolio of payoffs.  Develop rules to integrate the payoffs into utilities.  Develop decision criteria to convert utilities into preferences.

10. 10 Decision Structure Application: Hiroshima  Watch documentary  Search the web, and find more information about this topic.  Develop a decision-tree to represent the decision-making process.  Please note: This is not an exercise in the judgment of the morality of the decision. All we are looking for is to capture the various forces that influenced the decision. To this end, I want to see a decision-tree that helps structure the decision process.  If you find yourself getting stuck trying to generate the structure, stop. Stop and describe why a decision-tree approach does not work in this instance, and offer your solution for how to go about structuring this.