ABSTRACT
We all make choices that greatly affect our personal and professional lives. Similarly, the welfare of corporations and nations hinges on the ability of business and political leaders to make good decisions. These decisions are complex, involve significant uncertainty, and they depend on the decision maker’s preferences, which are difficult to quantify. Chapter 1 explained that design of a product is a sequence of decisions under uncer-
tainty. Designers want to choose the values of engineering and business attributes of a product to maximize an objective function, such as profit. For example, a car manufacturer wants to choose the wheelbase, the overall length, the engine type and power, and the car price in order to maximize the company’s profit. There is significant uncertainty in the cost, performance and demand of the final design in the early stages of its development. The profit from the product depends on the designers’ decisions and on the resolution of uncertain events such as the market conditions, the price of gas and the state of the economy during the life of the car model. People generally take poor decisions because they rely too much on intuition or
empirical rules. This chapter presents decision analysis, which is a structured approach for making better decisions using common sense rules (axioms) and mathematics. This approach enables the decision maker to quantify his/her preferences and beliefs about the likelihood of the outcomes of uncertain events, and to select the best course of action given these preferences and beliefs. Decision analysis is not a descriptive but a normative approach; it prescribes common sense rules for making choices – it does not describe nor explain how people make choices in real life. Decision analysis does not impose someone else’s preferences on the decision maker.
Although decision analysis does not guarantee a good consequence for every decision, it has better long term average performance than ad-hoc approaches or approaches based on empirical rules. A main reason is that it encourages a decision maker to think hard about the decision and make decisions that are consistent with his/her preferences and beliefs.
