DECISION ANALYSIS

COURSE OUTLINE

1. Introduction
Making decisions is a crucial element of a managers work. Making a decision can be
difficult and good decision making matters for the decision maker and his or her
surroundings, other people and entire organizations.
Learning more about the different elements of decisions, how decisions can be
structured and analysed can help us improve our decision process and the outcomes.

2. Objectives
We will study the decision making process, with a focus on (i) uncertainty and risk and
(ii) on time. These are fundamental elements of decisions and influence the
complexity of decision-making. We will mostly study individual decision-making. Some
time is dedicated to group decision-making and its specific characteristics.

3. Learning Outcomes
i.

Simplify a decision and reflect its main characteristics in a decision tree.

ii.

Specify the consequences of an alternative.

iii.

Create and analyze the risk profile of a decision.

iv.

Relate the risk profile to the risk taking capacity and relevant circumstances of
the decision maker.

v.

Project how changes in the decision characteristics would change the risk
profile and the preferred course of action. (What if? questions).

vi.

Distinguish different risk preferences and how they impact the preferred course
of action.
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vii.

Evaluate decision-making habits with respect to standards of rationality and

detect biases.

viii.

Apply probability judgments to managerial decisions.

ix.

Decide whether critical information for a decision is missing.

x.

Categorize uncertainties with respect to their value of information.

xi.

Apply the concept of simulation to decisions.

xii.

Perform comparative investment decision analysis. Use simplified approaches

through the NPV and IRR concepts and detect possible shortcomings.

xiii.

Determine optimal order quantities under uncertain demand.

4. Competences
General Competences (refer to list of general competences in the MBA)
Decision Making
Critical Thinking
Judgment
Communication
Specific Competences
Understand and apply appropriate quantitative and qualitative analysis and tools
to the decision making process in the presence of risk and uncertainty and when
outcomes occur over time.
Apply coherent and prudent risk attitudes and emit consistent and unbiased
judgments taking adequately into account the characteristics and circumstances of
the decision and decision maker.

5. Content
The course is divided in three parts: (1) Introduction and classical techniques, which
include decision structuring, decision under uncertainty, risk attitudes and the value
of information (2) Time Value of Money (NPV, IRR) and (3) Monte Carlo Simulation and
Group Decisions. Within the parts we will address both analytical and psychological
aspects.

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Decision Analysis

6. Methodology
The course is a combination of case discussions (60%), lectures (20%), and in class
exercises (20%).

7. Evaluation
Grading is based on contribution to in-class learning (20%), class assignments (15%), a
midterm exam (25%) and a final exam (40%).
Learning outcomes will be measured in the following way:
Mid term and final exam with decision making problems that require translating a
verbal description into a decision tree (outcomes i and ii), develop and evaluate risk
profiles (iii-v), discuss risk preferences and biases (vi and vii), calculate value of
information (x), impact of imperfect information (viii and ix). Simulation problems
setup, running and analysis (xi). Investment analysis and order quantity problems (xii
and xiii).
Hand in of simulation exercises (outcome xi)
Hand in of discounting exercises (outcome xii)

8. Course Outline & Bibliography

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Title of Session & Material

I. Introduction to Decision Analysis
Structuring a Decision
Case: T-Shirts for Eintracht Frankfurt
Should Markus Popp supply Eintracht Frankfurt?
Analyzing a decision problem
Case: 9-181-027 Freemark Abbey Winery
What would you recommend William Jaeger to do?
Submit your recommendation on the course website of the Global Campus.
Support Reading:
Value of technology and the Value of perfect information.
Case: AD-314-E Berfest AG. What do you recommend?
Individual electronic submission: Intuitive Decisions.
Probability Judgments
ADE-28-E Real Situations
What do you think about the probability reasoning of the lawyers in the case?
Sensitivity analysis
Case: NILOP Productions AD-333-E
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Behavioral attitudes towards uncertainty

Review of the answers to Individual Risk Preferences
Support Reading: ADN-259-E Intuitive decision making under uncertainty
II. Time Value of Money
Discounting - Introductory Lecture
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Support reading: ADN-257-E A note on Net Present Values and Internal Rates
of Return.
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Project Evaluation: NPV and IRR. ADE-26-E Exercises on Discounting 1 to 14
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Cash Flow Analysis. Case: AD-267-E Green Trees, Inc.
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Assessing the economics of an investment
Case: AD-301-E Ceranz Bau AG
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Time Perception and Time Related Decision Traps (Lecture-Discussion)
Support Reading: AND-264-E Time Perception and Decision Making
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Team electronic submission: Exercises on Discounting 15, 16, and 17.
12/13 Midterm Exam
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III. Monte-Carlo Simulation, Model Building and Order Quantity

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Continuous Distributions (lecture)

Support material:
Basic Probability Concepts (in your package)
ADN-258-E Measuring Uncertainty: Probability Functions
A first Encounter with Simulation
We will discuss the basics of Monte Carlo Simulation. You can work on but you
are not expected to have completed the following notes and exercises:
ADE-27-E Exercises on Monte Carlo Simulation
AND-273-E Introduction to Monte Carlo Simulation
After this class, install CrystalBall, following the instructions that will be
poste don GC
We will use the program in sessions 17-19.
Order Quantity Problems
AD-313-E Barbados Star
ADE-25-E Order Quantity Excercises
The Supply Chain in a Nutshell: Coordination.
AD-225-E Qumica del Valls (A)
Explain why the ICI manager is mad at Quimica.
Exercises on Simulation II
We continue with Monte-Carlo simulation,
Individual electronic submission: Amazing Lights.
Read the case AD-270-E Amazing Lights and follow the instructions in the Excel
file Amazing Lights.
Understanding a Business Model through Simulation
Case: AD-292-E Intertel: The Rate to Peru
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Valuing downstream decisions with simulation

UVA-F-1254SSRN Genzyme/Geltex Pharmaceutical Joint Venture
Spreadsheet Model (Posted on Global Campus)
1. What is the interest of Genzyme in Geltex products? Does this match
Genzymes risk-taking strategy? Why dont they buy Geltex?
2. If you are on the board of Genzyme, what is the information you want to
get from your evaluation team?
3. How much do you pay for the 50% stake in the Joint Venture?
IV. Special Topics
Group Decisions I: Decisions in the face of conflicting information.
Case: Speed Ventures A&B
Electronic Submission: I will post a short questionnaire on GC with a few
questions that prepare Session 23.
Team electronic submission: Piedmont Airlines (included in the Exercises on
Simulation).
This exercise is an opportunity to make sure that everyone in the team
understands the basics of modeling and simulation. Please, send an Excel file
with your model, including the report statistics of Crystal Ball as one more
page in the workbook, and a text box with the insights of the analysis and the
answers to a) and b).
Group Decisions II
Materials to be distributed.
Complexity and Creativity. Case: AD-270-E Amazing Lights
Final Exam

9. Bibliography
General
Dimitris Bertsimas and Robert M. Freund. Data, models, and Decisions: The
Fundamentals of Management Science. South-Western Pub. 2000.
Rex Brown. Rational Choice and Judgment Decision Analysis for the Decider.
John Wiley & Sons, Ltd. 2005.
Robert T. Clemen. Making Hard Decisions. Duxbury Press. 1996.
John S. Hammond, Ralph L. Keeney, and Howard Raiffa. Smart Choices: A
Practical Guide to Making Better Decisions. Harvard Business School Press. 1999.
Present Value
Richard A. Brealey, Stewart C. Myers. Principle of Corporate Finance. 7th Edition.
Irwin/McGraw-Hill. 2002.
David G. Luenberger. Investment Science, Oxford University Press. 1998.

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Decision Analysis

Simulation and Spreadsheet Model Building

Cliff T. Ragsdale. Spreadsheet Modeling and Decision Analysis. 3rd Edition. SouthWestern College Publishing. 2000.
Simon Benninga. Financial Modeling. The MIT Press. 2000.
Behavioral Decision Making
Daniel Kahneman. Thinking, fast and slow. Allen Lane, 2011. This book
summarizes Kahnemans thinking about judgment and decision making after an
almost 40-year research career in the field. Kahneman received the 2002 Nobel
Prize in Economics.
Rolf Dobelli. The art of thinking clearly. Sceptre, 2013. This book contains 99
newspaper columns each dedicated to a different cognitive bias.
Richard H. Thaler and Cass R. Sunstein. Nudge - Improving Decisions about
Health, Wealth and Happiness. Yale University Press. 2008. Thaler and Sunstein
explore how knowledge about decision making preferences and biases can help to
design choices that lead to better decisions. This book is the basis for the choice
architecture movement. Politicians have picked up on the importance of the field
to design public policies that will lead to better outcomes in health etc.
Governments in several countries (US, UK, Germany) have hired choice
architects.
Spyros Makridakis, Robin Hogarth and Anil Gaba. Dance with Chance. Oneworld
Publications. 2009.
Manuel Conthe. La Paradoja del Bronce: Espejismos y Sorpresas en el Mundo
de la Economia y la Politica. Editorial Critica. 2007.
Max H. Bazerman. Judgment in Managerial Decision Making. 6th Edition. John
Wiley & Sons, Ltd. 2006.
Russo, J. Edward and Paul J.H. Schoemaker. Winning Decisions: Getting it right
the first time. Currency Doubleday. 2002.
Robin Hogarth. Judgment and Choice: The psychology of decision. Wiley & Sons,
Ltd.
Gerd Gigerenzer. Reckoning with Risk. Penguin 2002.
Barry Schwartz, The Paradox of Choice, HarperCollins. 2004.
James Surowiecki, The Wisdom of Crowds, Abacus. 2005.