MGS QUIZ 1 Study Guide - Managerial Approach to Decision...

Managerial Approach to Decision Making – Management Situation: Decisions (Manager analyzes situation) alternatives: Implementation
(Decisions are implemented): Payoff (Consequences of decision)
Modeling Process – Diagnose the problem, select relevant aspects of reality, organize the facts; indentify the assumptions, objectives, and
decisions to be made, select the methodology, construct the model, solve the model (generate alternatives), interpret results (in “lay” terms),
validate the model (does it work correctly?), do sensitivity analysis (does the solution change?), implement the solution, monitor results.
Reasons for Modeling – Models force you to: be explicit about your objectives, think carefully about variables to include and their definitions in
terms that are quantifiable, identify and record the decisions that influence those objectives, identify and record interactions and trade-offs among
those decisions, consider what data are pertinent for quantification of those variables and determining their interactions, recognize constraints
(limitations) on the values that those quantified variables may assume, allow communication of your ideas and understanding to facilitate
teamwork.
Types of Models – Physical: tangible, comprehension is easy, duplicate and sharing is difficult, modification and manipulation is difficult and
scope of use is lowest: includes model airplane, model house, model city; analog: intangible, comprehension is harder, duplicate and sharing is
easier, mod. And mani. Is easier and scope is wider: includes road map, speedometer, pie chart; symbolic: intangible, comp. is hardest, dup. and
share is easiest, mod and mani is easiest, scope is widest: includes simulation model, algebraic model, spreadsheet model
Black Box Model – Exogenous variables: decisions (controllable), parameters (uncontrollable) go into the model = endogenous variables:
performance measures, consequence variables is the end results
Modeling Variables – modeling term – mgmt lingo – formal def – ex. Decision variable – lever – controllable exogenous input quantity –
investment amt; parameter – gauge – uncontrollable exogenous input quantity – interest rate; consequence variable – outcome – endogenous
output variable – commissions paid; performance measure – yardstick – endogenous variable used for evaluation (objective function value) – ROI
If it is beyond your control, do not consider it! – Overhead costs: a convenient fiction – we ignore; Sunk costs – we ignore; Depreciation
– only include if we can use to shield future taxes. Costs are linear in the short term y=mx+b: equation of a linear line
Deterministic models – are models in which all relevant data are assumed to be known w/ certainty, can handle complex situations w/ many
decisions & constraints, are very useful when there are few uncontrolled model inputs that are uncertain, are useful for a variety of mgmt
problems, allow for managerial interpretation of results, will help develop your ability to formulate models in general