Scientific Decision Making
Business: AQA A Level (2023 Specification), topic 2.2.1
Decision Making
Decisions can be made using different approaches. Either using scientific data, or based upon past experiences.
Methods to make decisions
- When decisions are made, managers can use different approaches to support them:
- Decisions can be made scientifically using data available to the manager.
- Decisions can be made based upon intuition and the experiences of a manager.
Advantages of scientific decision making
- Scientific decision making reduces the risk of making mistakes as decisions are based on data.
- Another advantage is that using data provides guidance for managers who may have limited intuition through lack of experience.
Disadvantages of scientific decision making
- Scientific decision making can be time-consuming to collect the data required.
- Relying on data may mean that the experience or expertise of staff may not be considered.
- Using out of date or poor data is unreliable and can affect the quality of the decision made.
Factors influencing decision making
- The availability and reliability of data are essential if a manager chooses to use scientific decision making. If data is not available, the scientific decision-making approach cannot be used.
- The manager’s experience is vital, as inexperienced managers are more likely to use scientific decision making because they have no experience or expertise.
- The risk that a business is willing to accept is crucial. Scientific decision making typically carries less risk so suits businesses that are less willing to accept risk.
Decision trees
- If managers choose to adopt a scientific decision making approach, they can use a decision tree to help them. A decision tree allows a business to compare outcomes of two or more options or decisions.
- A decision tree will examine the probability of each outcome for each decision made.
- A decision tree will multiply the probability with each outcome to calculate an estimated value (EV) for each option or decision being considered.
Example of Decision Making
Imagine a restaurant is deciding whether to expand (option 1) or open a new location (option 2). Here, a decision tree can be used to examine the range of possible outcomes.
Option 1
- In option 1, there may be a 70% chance of receiving a £10,000 pay-off or a 30% chance of a £20,000 pay-off.
- To calculate the EV for option 1:
- Multiply 0.70 (probability expressed as a decimal) by £10,000 to get £7,000.
- Multiply 0.30 (probability expressed as a decimal) by £20,000 to get £6,000.
- Using these probabilities and outcomes, the estimated value (EV) of option 1 is £13,000.
Option 2
- In option 2, there may be a 20% chance of receiving a £7,000 pay-off or an 80% chance of a £15,000 pay-off.
- To calculate the EV for option 2:
- Multiply 0.20 (probability expressed as a decimal) by £7,000 to get £1,400
- Multiply 0.80 (probability expressed as a decimal) by £15,000 to get £12,000
- Using these probabilities and outcomes, the estimated value (EV) of option 2 is £13,400
Conclusion
- Comparing estimated values for option one and two, scientifically it can be seen that option 2 is probably the best course of action for the manager to take based on the data available.
Test yourself on Scientific Decision Making
Which style of decision making is more time-consuming?
A business is deciding whether to launch a new product (option 1) or enter a new market (option 2).
Option 1 has an 80% chance of receiving a £35,000 pay off or a 20% chance of receiving a £50,000 pay off. Option 2 has a 40% chance of a £40,000 pay off or a 60% chance of a £50,000 pay off.
Which option is preferable for the business?A business is deciding whether to expand its product portfolio (option 1) or open a new store (option 2).
Option 1 has a 75% chance of receiving a £15,000 pay-off or a 25% chance of receiving a £20,000 pay-off.
Option 2 has a 70% chance of receiving a £18,000 pay-off or a 30% chance of a £22,000 pay-off.
Which EV is highest?