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investment decision-making in complex business environments where there is
substantial risk and uncertainty and each investment decision requires significant
capital expenditure without the prospect of revenues for many years.
Decision analysis (Raiffa, 1968; Howard, 1968; Raiffa and Schlaifer, 1961) is a label
given to a normative, axiomatic approach to investment decision-making under
conditions of risk and uncertainty (Goodwin and Wright, 1991). By using any one, or
a combination, of decision analysis techniques, the decision-maker is provided with
an indication of what their investment decision ought to be, based on logical argument
(Clemen, 1999). Previous research into the usage of decision analysis by companies
has typically been survey-based and produced evidence of a difference between the
decision analysis techniques described in the literature, and the decision analysis tools
which practitioners choose to use (for example see studies by Arnold and
Hatzopoulous, 1999; Carr and Tomkins, 1998; Schuyler, 1997; Buckley et al., 1996
Fletcher and Dromgoole, 1996; Shao and Shao, 1993; Kim et al., 1984; Stanley and
Block, 1983; Wicks Kelly and Philippatos, 1982; Bavishi, 1981; Oblak and Helm,
2 1980; Stonehill and Nathanson, 1968). It appears that whilst decision analysts describe a range of decision analysis techniques, some of which are very
sophisticated, organisational decision-makers are choosing to utilise only the most
simplistic tools and concepts in their investment decision-making (Atrill, 2000).
However, the methodological approaches adopted by the researchers conducting these
studies precluded them from providing any explanation into the reasons why some
techniques fail to be implemented and others succeed (Clemen, 1999). Consequently,
some writers, typically behavioural decision theorists such as Tocher (1976 and 1978
reprinted in French, 1989), have explained the results by arguing that decision-makers
choose not to use decision analysis techniques because their use adds no value to
organisations’ investment decision-making processes since decision analysis does not
aim to predict what decision-makers will do, only to suggest what they ought to do.
Clemen (1999) offers another interpretation. He believes that at least one reason why
decision analysis techniques and concepts are not widely used by organisations is that
no study to date has provided evidence that organisations that use decision analysis
tools perform better than those companies that do not. Despite over four decades of
research undertaken developing decision analysis tools, understanding the behavioural
and psychological aspects of investment decision-making and applying decision
analysis to practical examples, no research has been able to show conclusively what
works and what does not. Clemen (1999) believes that to rectify this situation, future
studies into investment decision-making should investigate the relationship between
organisational performance and the use of decision analysis techniques. If, as many
decision analysts believe (for example, French, 1989), companies that use decision
analysis in investment decision-making outperform thos...
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This document was uploaded on 03/30/2014.
- Summer '14
- The Land