Decision analysis models provide companies with specific methods for analyzing data related to potential decisions. Different models available include min-max reviews, expected payoff, or the opportunity loss expected when making a decision. There are often an unlimited number of decision analysis models that a company can use in a standard fashion. Companies should select the model that best fits the situation and the inputs available for upcoming decisions. Owners and executives are typically the individuals responsible for selecting the decision model, though input from operational managers can help provide important insight to the process.
In a min-max review, individuals often sort data according to each possible decision outcome result. The order of the data is extremely important, with the least profitable decision outcome result representing the min decision. All other decision outcome results go up in order until the company reaches the max point — or most profitable — decision outcome. The review process looks at the two min-max options to assess what happens in each decision, with the min representing the worst-case scenario in most cases. Companies can make decisions based these decision analysis models with the hopes of achieving the max decision outcome but planning for the worst.
Expected payoff decision analysis models review the probabilities by which a company can expect outcomes to occur. In many cases, this model coincides with decision tree analysis, creating a hybrid model for making decisions. Each probable outcome has a dollar amount attached to it, so a company can assess the payoff for capital outlays. For example, the best-case scenario has a 20 percent possibility of occurrence, and there is a 50 percent for the average outcome and a 30 percent for the least profitable opportunity to occur. Dollar amounts for each of these outcomes then help a company determine how much profit a company can expect in order to pay for project-related expenses.
Opportunity loss decision analysis models take more of a dollar approach to the analysis of decision outcomes. A company needs to outline all costs associated with potential decision outcomes. These should represent all costs to set up the operations necessary to start the project and run it for a few months. The potential income for each decision should also be listed for each decision outcome. The opportunity loss represents the income lost once a company selects one project over another, which may be significant depending on the number of available options for the business.
