Structure and

Elements of
Decision Making
Session 2
Decision Making and Risk
Partha Krishnamurthy

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Representing Decisions
 Are there ways of structuring and representing decisions?

Reports that say that something hasn't

 Why should we structure decisions?
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;
 How can we structure decisions? 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.
 Decision trees.
 Help structure the decision
 Know what is known and unknown
 Helps understand disagreements.
 Helps grasp various facets of a decision.

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Structuring Decisions

Outcome A1
Payoff A1
Option A p(A1)

Outcome A2
Payoff A2
p(A2)

Outcome B1
Payoff B1
p(B1)
Option B

Outcome B2
Payoff B2
p(B2)

3
Understanding Decision
Options

Outcome A1
Payoff Portfolio A1
Option A p(A1)

Outcome A2
Payoff Portfolio A2
p(A2)

Outcome B1
Payoff Portfolio B1
p(B1)
Option B

Outcome B2
Payoff Portfolio B2
p(B2)

Option Portfolio

Known Options
Unknown Options
Deferred Decision 4
Understanding Outcomes of
Options
Outcome Portfolio

Known Outcomes
Unknown Outcomes
Outcome probabilities
Distribution

Outcome A1
Payoff Portfolio A1
Option A p(A1)

Outcome A2
Payoff Portfolio A2
p(A2)

Outcome B1
Payoff Portfolio B1
p(B1)
Option B

Outcome B2
Payoff Portfolio B2
p(B2)

5
Understanding Payoffs from
Outcomes
Payoff Portfolio

Simple Payoffs
Outcome A1
$ metric
Payoff Portfolio A1
Option A p(A1) Complex Payoffs
Revenues
Outcome A2
Payoff Portfolio A2 Costs
p(A2) Learning
Turnover
Morale
Comp. Response
Outcome B1
Future Options
Payoff Portfolio B1 Tech
p(B1)
Option B Market
Facilities
Outcome B2
Payoff Portfolio B2
p(B2)

Integrating payoffs to
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determine overall utility
Understanding Decision
Forks

Outcome A1
Payoff Portfolio A1
Option A p(A1)

Outcome A2
Payoff Portfolio A2
p(A2)

Choose or
Reject
Outcome B1
Payoff Portfolio B1
p(B1)
Option B

Outcome B2
Payoff Portfolio B2
Decision Task p(B2)

Choosing or
Rejecting
Should have no
implication for the
decision under
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rationality assumptions
Decision Making Structure -
Recap
Outcome Portfolio

Known Outcomes
Unknown Outcomes Payoff Portfolio
Outcome probabilities
Distribution
Simple Payoffs
Outcome A1
$ metric
Payoff Portfolio A1
Option A p(A1) Complex Payoffs
Revenues
Outcome A2
Payoff Portfolio A2 Costs
p(A2) Learning
Turnover
Morale
Choose or Comp. Response
Reject
Outcome B1
Future Options
Payoff Portfolio B1 Tech
p(B1)
Option B Market
Facilities
Outcome B2
Payoff Portfolio B2
Decision Task p(B2)

Choosing or
Rejecting Option Portfolio
Should have no
implication for the Known Options
decision under Unknown Options Integrating payoffs to
Deferred Decision 8
rationality assumptions determine overall utility
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.
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 Develop decision criteria to convert utilities into
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 10

solution for how to go about structuring this.