Rational Decision Making: Choosing the Best Alternative.

Earlier we indicated that choosing the best alternativemay be simply a matter of determining which alternative best meets the selection criterion.But the solutions to most problems in economics have market consequences, extra-market consequences, and intangible consequences. Since the intangible consequences of possible alternatives are left out of the numerical calculations, they should be introduced into the decision-making process at this point. The alternative to be chosen is the one that best meets the choice criterion after considering both the numerical consequences and the consequences not included in the monetary analysis.

During the decision-makingprocess certain feasible alternativesare eliminated because they are dominated by other, better alternatives. For example, shopping for a computer on-line may allow you to buy a custom-configured computer for less money than a stock computer in a local store. Buying at the local store is feasible, but dominated.While elimi-nating dominated alternativesmakes the decision-making process more efficient, there are dangers.

Having examined the structure of the decision-making process, it is appropriate to ask, When is a decision made, and who makes it? If one person performs all the steps in decision making, then he is the decision maker. When he makes the decision is less clear.

The selection of the feasible alternativesmay be the key item, with the rest of the analysis a methodical process leading to the inevitable decision. We can see that the decision may be drastically affected, or even predetermined, by the way in which the decision-making process is carried out. This is illustrated by the following example.

Liz, a young engineer, was assigned tomake an analysis of additional equipment needed for the machine shop. The single criterion for selection was that the equipment should be the most economical, considering both initial costs and future operating costs. A little investigation by Liz revealed three practical alternatives:

1. A new specialized lathe
2. A new general-purpose lathe
3. A rebuilt lathe available from a used-equipment dealer

A preliminary analysis indicated that the rebuilt lathe would be the most economical.

Liz did not like the idea of buying a rebuilt lathe, so she decided to discard that alternative. She prepared a two-alternative analysis that showed that the general-purpose lathe was more economical than the specialized lathe. She presented this completed analysis to her manager. The manager assumed that the two alternatives presented were the best of all feasible alternatives, and he approved Liz's recommendation.

At this point we should ask: Who was the decision maker, Liz or her n'Ianager? Although the manager signed his name at the bottom of the economic analysis worksheets to authorize purchasing the general-purpose lathe, he was merely authorizing what already had been made inevitable, and thus he was not the decision maker. Rather Liz had made the key decision when she decided to discard the most economical alternative from further consideration. The result was a decision to buy the better of the two less economically desirable alternatives.


Post a Comment