Judgment in Managerial Decision Making: Essay

Secondly, the manager should consider calculating an expected value for every concluded branch, then each probable node and every decision node as a simple means of identifying expected values for each decision alternative. While the expected value is equal to the payoff, it is also the product of its probability and payoff.

Due to its results, the expected value rule is regarded as the most reliable way of judgment in managerial decision making because of its reliability in maximizing anticipated profit. However, the ability of a manager to reach actual decisions and maximize profit through this tool is based on his/her willingness to accept risk. The expected value rule is reliable because it enables managers to have different attitudes towards risk-taking in the process of making decisions. The different attitudes in turn enable managers to make risky decisions in ways that maximizes expected utility of the valuable or profitable outcomes.

An example of the application of the expected value rule to make a decision involved deciding whether to purchase a new automatic security system or employ a guard.This decision was fueled by the need to enhance security given the recent increase of insecurity. I started by looking at the payoffs of each of these decision alternatives, which is improved security. The purchase and installation of an automatic security system would require huge one-off cost of nearly $1,000 while employing a security guard will cost approximately $500 per month. While the second decision alternative is cheaper in the short-term, it is expensive in the long-run. Therefore, I decided to purchase and install an automatic security system because it will cost less in the long-term and help enhance security.

References:

Olivas, R. (2007). 3.4. Expected Value. Retrieved April 10, 2014, from http://www.stylusandslate.com/decision_trees/3_0_basic_concepts/3_4_expected_value/3_4_expected_value.html

Thomas, C.R. & Maurice, S.C. (2008). Decisions Under Risk and Uncertainty. In Managerial

Economics (9th ed., Chapter 15). Retrieved from http://highered.mcgraw-hill.com/sites/0073402818/student_view0/chapter15/.....