A decision analysis formally models a strategic decision, or a tactical decision requiring substantial investment or having large-scale consequences. The decision model helps the (individual or group) decision maker understand the alternatives, uncertainties, and possible outcomes in depth, to support the most rational decision possible, given the decision maker’s attitude towards risk. The model also helps identify uncertainties that should be reduced before making the decision, and indicates how to reduce them.
A decision analysis positions the decision maker to make an important decision confidently. The decision maker knows they have explored every aspect of the decision as thoroughly as is practical, given time and budget constraints. They understand which options are most rational, given the information available to them. And the modeling process has helped the decision maker gain the understanding and support of other stakeholders.
Examples of decisions benefitting from formal analysis include
- whether to enter a given market,
- whether to acquire a business, and
- where to locate a facility.
Decision analysis routinely discovers aspects of a decision about which the decision maker faces unacceptably high uncertainty. Such uncertainties can be reduced through value of information (VoI) analysis. VoI analysis determines when it is prudent to incur a small expense to reduce an important uncertainty affecting a decision’s outcome, and how to do so.
Decision analysis can account explicitly for the decision maker’s risk tolerance. And it can include sensitivity analysis, which explores whether and how the optimal decision changes with variations in risk tolerance, perceived likelihoods, and possible outcomes.
In sum, a decision analysis generally includes
- a model of the decision that quantifies alternatives, risk tolerance, uncertainties, and possible outcomes;
- VoI analyses and their results; and
- a sensitivity analysis.
The analytical process emphasizes broad executive participation, to cultivate stakeholder support for the model’s recommendations.