Decision analysis is an approach to choosing the best option out of the possible alternatives in an environment that is uncertain. It is a visual approach to making decisions that are based on systematic and quantitative analysis of the available options (Munda 2016). It is helpful for a business in situations where it has to choose between options that have different outcomes and are uncertain. It uses various tools for analysing the decisions as there is more than one variable to consider and has different outcomes to each decision. It comprises aspects that are taken from psychology, techniques of management and economics.
There are multiple quantitative methods of analysing decisions which are as follows:
- Decision-making matrix- It is a table prepared for the available alternatives and the criteria to evaluate them. Each criterion is assigned a weight which is multiplied with the score of each alternative to get the product, and the best alternative is chosen.
- Sensitivity analysis- It is used alongside other sensitivity analysis models to get the outcome with varying factors. The outcome is analysed for various decisions under different input variables.
- Expected monetary value- It is the average monetary value that can be expected from a decision. This is derived by multiplying the outcomes by the probability of occurring. The outcome with the highest expected monetary value can be chosen (Costa 2016).
- Payoff table- A payoff table is based on the expected monetary values of each decision under different criteria. The expected payoffs are listed based on the probability of the outcomes, and the outcome with the highest payoff is selected.
- Decision trees- It is a diagram that is shaped like a tree used to evaluate various possibilities of a situation. Each decision-making situation is clearly shown in the diagram, and the expected value of each outcome from the decision is calculated by multiplying with the probability (Accaglobal.com 2022). The graphical representation of decision analysis with the help of a decision tree or influence diagram is helpful in detailing the situation and uncertainties along with the outcomes of each decision.
- Monte Carlo simulation- It is a model that is used to forecast the outcomes and their probabilities of occurring when there is a presence of a random variable. A business decision is based on multiple variables that are uncertain, and Monte Carlo simulation helps in providing the chance of various outcomes (IBM.com 2022).
Decision analysis is an effective approach for making decisions in an accounting information system. It provides a scientific and quantitative approach for deciding on complex situations of the business. It takes into consideration all possible outcomes within the analysis, and each outcome can be traced back to the decisions. It assigns a separate value for each outcome which reduces the uncertainty involved in decision making and makes the result of each action clear. Various problems of decision making can be addressed with these models like the net present value can be combined with decision analysis for in-depth analysis of multiple actions that are available in a situation.
Accaglobal.com, 2022. Decision trees | F5 Performance Management | ACCA Qualification | Students | ACCA Global. [online] Accaglobal.com. Available at: <https://www.accaglobal.com/pk/en/student/exam-support-resources/fundamentals-exams-study-resources/f5/technical-articles/decision-trees.html> [Accessed 19 March 2022].
Costa, H.R., 2016. Calculating the Real Expected Monetary Value of a Project. Association of Global Management Studies, p.24.
IBM.com, 2022. What is Monte Carlo Simulation?. [online] IBM.com. Available at: <https://www.ibm.com/in-en/cloud/learn/monte-carlo-simulation> [Accessed 19 March 2022].
Munda, G., 2016. Multiple criteria decision analysis and sustainable development. In Multiple criteria decision analysis (pp. 1235-1267). Springer, New York, NY.