1. What is a decision-making model?

A decision-making model is a process, which individuals can follow or imitate to

ensure they make the best choice among various options. The model used to
guide teams to make decisions that can benefit their companies.

2. Types of decision-making models

2.1. Rational decision mode
a. Definition
Rational decision-making is the most popular type of model. It is logical and
sequential and focuses on listing as many alternatives as possible.
b. Process

c. When to use decision-making model

Identify all relevant criteria and alternatives for the decision you want to make
Complex in decision making
2.2. Intuitive decision model
a. Definition
Intuitive decision model focus on there being no real logic or reason to the
decision-making process. The process is dictated by an inner knowledge or
intuition about what the right is.
b. When to use decision-making model
Make decisions naturally
Without the use of formal tools and procedures

2.3. Recognition primed model

a. Definition
Recognition primed model is a combination of rational and intuitive decision-
making. Its defining element is that the decision maker only and the success rate
of this model correlates to an individual’s experience and expertise. 
b. Process 

 
c. When to use decision-making model 
 Clear define the goal or obstacle you want to achieve
 You are experienced 
 Create a solution quickly
2.4. Creative model
a. Definition
Creative model is the generation of new, imaginative ideas. In this decision-
making model, users collect information and insights about the problem and
create some intial ideas for solutions. 
b. Process 

c. When to use decision-making model

 Solutions to the problem are not clear. 
 You may not have experience with your goal or obstacle.
 You have time to immerse yourself in the issues. 

3. Decision analysis 
3.1. Decision-making enviroments:  
In each enviroment, the decision maker depends on how much knowleade or
information they have about the situation. There are three decision making
enviroments. 
a. Decision making under certainty
a.1. Definition
Decision makers know with certainty the outcome of every alternative. Naturally,
they will choose the alternative that will maximize well-being or will result in the
best. 
a.2. Examples
Example 1: A factory produces 2 types of products I and II. To produce products I
need 4 A units and 2 B units, those criteria for a type II per unit are 2 and 4. Raw
materials A and B are 60 and 48 units. Determination of maximize production
plans. 
max 8 x 1+ 6 x2
 {
4 x 1+ 2 x 2 ≤ 60
s . t . 2 x 1+ 4 x 2 ≤ 48 Here the decision variables x1 and x2 represent production
x1 , x2≥ 0
quantities of two items; in a real-life problem, we have many more items, and
their production could be restricted to integer amount xi , I ϵ {0 , 1 ,2 , 3 , .. . }. This
objective function is not exactly their production plan in reality, but it can make
you know about the best.
Example 2: The economic order quantity model
min h Q + Ad
Q ≥0 2 Q
In this case, having only one nonnegative decision variable Q, but the form of the
objective function is more complicated than Eq. To begin with, it is nonlinear;
then it is not defined for Q = 0. If we extend the objective function so that is takes
the value + ∞ when Q = 0, we immediately see that, since we are minimizing a
cost, we may consider the interval Q ≥ 0 as the feasible region.
a.3. Problems and solutions
Linear programming problems:
 Formula
x: variable.
c x : objective function.
T

Ax – b: constraint functions.
o The standard form:
T
min c x
s . t . Ax ≥ b
x≥0

o The canonical form:

min c T x
s . t . Ax=b
x ≥0

 Solutions
o Simplex method
(1) Find a vertex.
(2) Determine the optimal solution. If so, stop else go to (3).
(3) Find another vertex that is better and go back (2).
=> Vertex solution
- Consider the feasible set D:
Ax=b , x ≥ 0- Denote Aj the i-th column of matrix A.
- Let x0 ∈ D
- J(x0) := { j∈ { 1 ,... , n }∨x 0j >0 }
Solution: x0 will be a vertex of D, if vectors Aj are linearly independent and x0 ∈ D.
o Graphical method
(1) Plot the feasible region defined by the constraints.
(2) Plot the level sets of the objective function.
(3) For a maximization problem, identify the level set corresponding the greatest
(least) objective function value that intersects the feasible region. The point will
be at a corner.
(4) The point on the corner interesting the greatest (least) level set is a solution
to the LP.
b. Decision making under uncertainty
b.1. Definition
There are several possible outcomes for each alternative, and the decision maker
does not know the probabilities of the various outcomes (Probabilities are not
known). 
b.2. Example
A company has just bidding a new contract on a product. After thorough analysis,
the Executive Board found that the consumer market may fall into one of the two
states: the market is favorable or unfavorable. The actions that the company can
carry out a large plant (expanding the factory and rebuilding the factory), a small
plant (rebuilding the factory), do nothing (reselling the contract).
b.3. Problems and solutions
Suppose: Max1 > Max2 > 0 and Min1 < Min2 < 0.
Alternative State of nature
State1 State2 Maximum in a column
A large plant Max1 Min1 Max1
A small plant Max2 Min2 Max2
Do nothing 0 0 0
=> If you choose Max1, it will be called the maximax decision (optimistic
approach). Contrary, it will be called the maximin decision (pessimistic approach).

Alternative State of nature Weighted average

(With α)
State1 State2
 A large plant Max1 Min1 α Max1+ (1- α) Min1
A small plant Max2 Min2 α Max2+ (1- α) Min2
Do nothing 0 0 0
=> If you choose the value that is maximum at weight average column, it will be
called the criterion realism decision (use weight average approach).
Alternative State of nature Row average
State1 State2
A large plant Max1 Min1 ( Max 1+ Min 1)
Number of states

A small plant Max2 Min2 ( Max 2+ Min 2)

Number of states

Do nothing 0 0 0
=> If you choose the value that is minimum at row average column, it will be
called the equally likely decision (use the average outcome).
Alternative State of nature Maximum in a row
State1 State2
A large plant Max1- 0-Min1 α Max1+ (1- α) Min1
Max 1
A small plant Max1- 0-Min2 α Max2+ (1- α) Min2
Max2
Do nothing Max1-0 0-0 0
=> If you choose the value that is minimum at Maximum in a row column, it will
be called the Minimax decision (base on opportunity loss).
c. Decision making under risk
c.1. Definition
There are several possible outcomes for each alternative, and the decision maker
know the probability of occurrence of each outcome. (Probabilities are known).
c.2. Example
A selling orange store for 90 days with profits per orange box is $ 5 (buy $ 3, sell $
8) if sold, if not sold, hole $ 3. Decide: how many orange boxes every day need to
be ordered for the most effective business. The following is the data of selling.
Net income per day Days Probabilities
10 boxes 18 0.2
 11 boxes 36 0.4
12 boxes 27 0.3
13 boxes 9 0.1

c.3. Problems and solutions

Alternative State of nature EMV
State1 State2
Alternative1 Max1 Min1 EMV1
Alternative2 Max2 Min2 EMV2
Do nothing 0 0 0
Probabilities α β
n
EMV =∑ ( payoff ∈ statei of nature∗probability of state i of nature )
1

=> Should choose the best EMV.

3.2. Mathematics decision-making tools
a. Decision tree

a.1. Definition
A decision tree is a specific type of flow chart used to visualize the decision-
making process by mapping out different alternative, as well as their potential
outcomes.
a.2. Why should use decision tree
 Decision tree are flexible.
 Effectively communicate complex processes.
 Focused on probability and data not emotions and bias.
 Clarify choices, risks, objectives, and gains.
 Enable you to flesh out your ideas fully before sinking in valuable time and
resources.
b. Break even analysis

c. Ratio analysis
 Profitability ratios indicate how efficiently a company generates profit and
value for shareholders.
o Gross profit ratios
Gross profit
Gross profit ratio=
Net sales
o Net profit ratios
Net income
Net profit ratio=
Net sales
o Operating profits ratios
 Operating profit
Operating profit ratio=
Net sales
o Return on capital employed
EBIT
Return on capital employed=
Capital employed
 Solvency ratios measure a company’s financial health with long-term debts.
o Debt equity ratio
Total liabilities
Debt equity ratio=
Total equity
o Interest coverage ratio
EBIT
Interest coverage ratio=
Interest expense
 Liquidity ratios measure a company’s ability to pay debt obligations and its
margin of safety.
o Current ratio
Current assets
Current ratio=
Current liabilities
o Quick ratio
Current assets−Inventory−Prepaid expenses
Quick ratio=
Current liabilities
 Turnover ratios measure the efficiency of investments made by the firm in the
form or revenues and the cost of goods sold generated during a period.
o Fixed asset turnover ratio
Net sales
¿ asset turnover ratio=
¿ assets
o Inventory turnover ratio
Cost of goods sold
Inventory turnover ratio=
Inventory
o Receivable turnover ratio
Credit sales
Receivable turnover ratio=
Accounts receivable
 Earnings ratios measure the efficiency of the shareholders’ capital to generate
profit.
o Price to earnings ratio
Share price
Price ¿ earnings ratio=
Earnings per share
o Earnings per share
Total earnings
Earnings per share=
Average shares outstanding
o Return on equity
 Net income
ROE=
Physical assets+( Current assets−Current liabilities)