Decision analysis – What is it, definition and concept | 2022

Decision analysis is a logical, systematic, qualitative and quantitative process used to determine and assess the most important factors affecting decision making.

That is, decision analysis helps to assess the important decisions that need to be made. An important decision is one that can affect a particular person, an organization or company, and can even affect an entire country.

For that reason, we must be very careful when making decisions. A good decision is made following a logical process, considering all available information and analyzing all possible alternatives. Qualitative or quantitative criteria must then be used to choose the best option.

Without a doubt, making good or bad decisions can lead to success or failure. Since, making a good decision can change the lives of people and the destiny of organizations and institutions.

Keep learning economics, finance and investment

Learn from scratch to improve your finances and investments, or specialize in the most in-demand areas of financial work: investing, stocks, savings, asset management, banking, business analysis, and accounting. All courses in a single subscription.

Now you can watch the first episode of each course for free:

Of course, the decision-making process does not apply when making unimportant decisions. If not, only when the decisions are complex and important. This implies that we are risking a lot and we are not sure what can happen.

Steps to Follow in Decision Analysis

The basic steps followed in decision analysis are:

1. Research and definition of the problem

To begin with, when applying decision analysis, you must first look for all the important information that will affect the decision making. This will make it possible to delimit the problem in terms of possible alternatives for its solution and to identify the risks that are faced. An alternative is a course of action that can be followed when making a decision.

See also  Vertical and horizontal analysis | Economipedia

2. Know the results of each alternative and analyze the risks

In this step, the outcomes and risks affecting each of the alternatives are analyzed. Since, if all these factors are not taken into account, a decision will not be made that is logical. Regarding the risk, it can be considered to eliminate, reduce or tolerate the risk. This will allow for fewer problems in the future.

3. Choose the model to follow in decision making

Next, it is convenient to choose the analysis model that will be used to make the decision. In this sense, a SWOT analysis, a decision tree or a risk management model can be used.

4. Proposal of solutions

Then, we proceed to propose solutions, if it is within a group you can use a brainstorm so that each one proposes a solution. In this way, several proposals can be obtained and evaluated. Trying to choose the best proposal to obtain a better solution.

5. Decision making

Finally, the decision is made, this decision is based on the expected results and risks. Decision making may be made using qualitative or quantitative methods.

Decision Analysis 1
Decision Analysis
steps to follow

Example of a decision-making analysis

To exemplify, we are going to take as a reference a company that intends to invest and buy shares in the market. The amount of money you want to invest is $150,000. This capital can be invested in two different corporations. Corporation X and Corporation Y.

  • The shares of corporation X have a certain level of risk, but even with that condition they could have a return of 50% in the next year. This when the market presents an upward trend. Now, if the market is trending down, the stock could lose 30% of its value.
  • On the other hand, the shares of corporation Y are considered safe. The return on the up market could be 20%. If downside conditions occur, the yield could be 5%.
  • The company that wants to make the investment has enough information. The information is based on studies by specialized institutions in the market and accredited publications. Which affirm that the probability that the bullish situation is presented is 60%. While, the probability that the bearish situation occurs is 40%.

Proceed as exemplified in the tables and then make the decision to invest in corporation X because it offers better returns.

Decision Analysis 2
Decision Analysis
Decision Analysis 3
Decision Analysis

A decision tree could also be developed. In this case, since there are only two decision alternatives, the tree will have two branches. In each one the relevant information appears and on it the decision to invest in the shares of corporation X is made.

Decision Analysis 4
Decision Analysis
Decisions Tree

In conclusion, it can be stated that decision analysis is a process that facilitates decision making. Making a good decision implies choosing the alternative that presents us with the greatest probability of obtaining better results.

In other words, decision analysis allows us to follow a systematic and rational process, in which all available information on each of the alternatives is analyzed. So that on that basis we make the best decision.

Leave a Comment