MIXING OF MARKOV PROCESSES*

This paper considers a Markov process in which there are rewards associated with state transitions. Two or more actions are available to the decision maker, and the transition probabilitities and the rewards are influenced by the actions selected. A key assumption is that control cannot be a function of the current state of the process. In other words, the decision maker is assumed to have no knowledge of the current state of the process (or to ignore such knowledge if it exists). Within this context the problem of determining the best randomized policy, the best in the sense of maximizing the expected reward per transition in the steady state, is discussed. Analytic results are developed for the simplest case of a two state process with two possible actions.     

USING FISHBURN'S TECHNIQUES FOR ANALYSIS OF DECISION TREES: SOME EXAMPLES*

Techniques for the analysis of payoff matrices with “imprecise” assessment of state probabilities are applied to the analysis of decision trees in normal form. The analytical techniques, due to Peter Fishburn, are summarized and then illustrated by analyzing two decision trees. Problem I, a two state problem, provides geometrical analogs for the two most “imprecise” probability assessments and simple analytical and geometrical analogs for the least “imprecise” probability assessment. Problem II, a three state problem, illustrates the application of all four precision levels, from most “imprecise” through least “imprecise.”     

THE TRADE DISCOUNT DECISION: A MARKOV CHAIN APPROACH*

Economic theory indicates that higher returns are required from investments that have higher risk. Two major reasons for offering trade discounts are to stimulate sales and to speed up cash receipts. Both sales increases and the earlier receipt of cash impact the risk/return characteristics of a firm. This study uses a Markov chain model to demonstrate how alternative trade credit policies impact the risk and required returns of a firm. The amount of risk and return per credit sale is calculated, and the coefficient of variation is used as a risk/return measure per credit sale. The study concludes that trade discounts can have a favorable impact on the risk/return characteristics of a firm, even in the absence of increased sales volume. Other discount decision factors which are either directly or indirectly determined in this paper include: (1) the average number of periods for which an account is outstanding, (2) the probability of collection and bad-debt losses over the average account period, (3) the average speed of payment, and (4) the average amount of cash tied up in accounts receivable.     

DECISION MAKING PROCESSES: USING DISCRIMINATION NETS FOR SECURITY SELECTION

This paper examines the judgmental processes of individuals involved in stock selection through the use of discrimination nets. Research has shown that there is no incompatibility in the so-called random walk model and the fundamentalist or intrinsic approach. Doing systematically better than the average investor implies that the superior investor has a superior way of evaluating existing information. An improved market success depends in part on an increased understanding of investors decisionmaking processes. Thus, if a superior investor's judgmental processes can be demonstrated and readily modeled, then, the next step would be to compare these decision processes with those of the average investors and note differences. The results of this study showed that the decision-making processes of individuals not only can be adequately programmed, but that the decision process is rather stable for a given investor. The paper also shows, however, that while the model accurately predicted accept or reject decisions, in most cases it was limited in its ability to rank order securities from the set of accepted investments.     

ADAPTIVE CONTROL THEORY: SURVEY AND POTENTIAL APPLICATIONS TO DECISION PROCESSES*

An important and distinct feature of a class of decision processes discussed in this paper is the possibility of gathering additional information between decisions and using it to improve future decisions. The analysis of these so-called sequential decision processes is both complicated and far-reaching in its implications. The purpose of this paper is to describe this class of decision processes to make its potential both more readily understood and better appreciated.     

A PENSION DECISION MODEL FOR THE EMPLOYER*

Recently, the Financial Accounting Standards Board (FASB) reevaluated accounting for pension plans. The issue is emotional and highly political in nature. The FASB attempted to justify its approach on the basis of measuring economic activity, but it failed to provide much in the way of analytical support. This paper provides a managerial decision model and an economic basis for the existence of pension plans. A pension plan is described as a cost-saving, risk-sharing, incentive contract. The analysis is developed using agency theory. The model presented here meets three suggested objectives of an employer: 1. Maximization of utility through the maximization of profit 2. Ability to conform the risk characteristics of an employment contract to the risk characteristics of the employer 3. Diversification of the risk inherent in the employment contract Profit is maximized by producing cost savings associated with employee tenure and loyalty. Sharing cost savings with employees (i.e., offering a pension plan) meets the above objectives. The employer determines the optimal sharing rate for the expected cost savings. An examination of the employer's underlying decision process reveals implications for pension plan accounting which generally are consistent with and support the FASB's Statement of Financial Accounting Standards No. 87 [5].     

COMPUTER GRAPHICS AS DECISION AIDS: DIRECTIONS FOR RESEARCH*

Computer-generated graphics are becoming increasingly available to decision makers. Despite claims on the part of vendors that the use of graphics will improve decision speed and quality over traditional methods of data display, the available evidence is far from supportive. Initial studies show graphics to be no more effective in communicating information than tables. Correct interpretation of graphical displays appears to require training, which most users lack. Furthermore, there is evidence that those features that make a graph visually attractive—such as color, design complexity, and realism—may actually detract from accurate comprehension. This paper summarizes the literature dealing with the human use of graphics, develops several propositions based on persistent trends in the literature, and suggests directions for future research.     

A DECISION MODEL FOR SELECTING ALTERNATIVE HYPOTHESES: AN EXTENSION*

A decision rule for selecting a one-sided or two-sided alternative for a standard hypothesis test is developed. Using a prior distribution of the parameter to be tested, the alternative is chosen which maximizes expected power. The test of a binomial parameter is presented to illustrate the method.     

A STRATEGY FOR INTEGRATING QUANTITATIVE TECHNIQUES INTO THE BUSINESS CURRICULUM*

Quantitative methods courses play an increasingly significant role in the programs of Schools of Business. However, maximum utilization of the concepts can occur only when these quantitative techniques have been integrated into the various functional areas via a faculty knowledgeable with such techniques and their applications. Lacking sufficient stimuli, this integrative process is observed to be one of an evolutionary nature. This article presents a strategy for stimulation of this process.     

MARKOV PROCESS AND CREDIT COLLECTION POLICY*

This paper deals with the evaluation of credit collection policy alternatives, given the credit granting function. Credit collection policy determines the intensity of collection efforts and the timing for recognition of bad debts. The Markov Process is utilized to estimate dynamic cash flow behavior for available policy alternatives. For this purpose, both transient and steady-state components of cash-flow behavior are considered. Operational guidelines are outlined with the help of a single example. The strength of the proposed model stems from its a) consistency with the conventional capital budgeting process, b) modest input data requirements, and c) expediency in obtaining results.     

THE IMPACT OF ALTERNATE DECISION TECHNIQUES ON USER BEHAVIOR

The quantitative disciplines have focused their efforts primarily upon more complete and efficient methods for analyzing decision problems. Almost totally neglected in these efforts is the interplay between a decision technique and its ultimate user. This interface is of crucial importance to the continued success of the decision sciences in organizations. Data are presented to support the contention that decision techniques and their resultant impact on job content interact with psychological variables to cause variation in user satisfaction and performance. These results are similar to the effects hypothesized to occur at blue collar levels in organizations.     

EIGENVALUES FOR THE DECISION SCIENCES

This paper gives an example of how to structure a set of lectures on eigenvalues and eigenvectors for students of economics, finance, or any of the other decision sciences. It is presented in a fairly self-contained style, suitable for the relative beginner, but its main purpose is to present the instructor with a way to motivate definitions and tie key concepts together.     

SESAME STREET FOR DECISION SCIENCES

In Part I, several problems confronting learning and teaching in Decision Sciences are examined and possible solutions presented. Students dislike and fear mathematics, treat it as a foreign language (a dead one at that), and are subjected to archaic teaching methods. Teachers suffer from poor training, incongruent goals, and inadequate models. As the popularity of the Decision Sciences dwindles, teaching becomes even more critical in our profession. In Part II, three designs for teaching operations research or statistics with organizational behavior are presented. These have all been implemented during the last three years. These designs attempt to take advantage of principles learned in organizational behavior to enhance the learning situation in the quantitative courses in decision sciences.     

POTENTIAL RESEARCH TOPICS IN DECISION ANALYSIS*

Robert L. Winkler's paper [1] provides a comprehensive overview of challenging research areas for decision making under uncertainty. Hence, rather than try to extend the list of research areas identified, this note will attempt to embellish some that I feel are particularly important. In these areas, I feel the value of systematic research is particularly high. For convenience, the discussion will be organized under the four research categories identified by Winkler with a couple of sugestions following in an “implementation research” category. The reader will note, however, that many of the suggested topics actually relate to more than one research category.     

NONECONOMIC CRITERIA AND THE DECISION PROCESS*

This paper describes a method for systematically including consideration of noneconomic criteria in the decision-making process. It focuses on the Space Applications Program of the National Aeronautics and Space Administration, but is intended as a general outline applicable to decision problems in both government and business. The methodology involves four stages. First, a Criteria Set is developed by a panel of members with diverse backgrounds. Second, the criteria are made operational by posing a series of carefully worded questions to appropriate experts. Then the responses are scaled according to the degree of refinement considered necessary and appropriate. To allow flexibility and to accommodate differences in the degree of precision considered feasible, a number of scaling methods are identified. These range from a simple positive-negative response checkoff to summation of individually-weighted criteria with interaction among criteria. Finally, projects are selected on the basis of predetermined standards of choice.     

DECISION FLEXIBILITY AND PERCEIVED INFORMATION VALUE*

This paper reports the results of an experiment that examined the effects of information evaluators' perceptions of decision flexibility as a determinant of information value. This study suggests that subjects fall into relatively distinct groups that are differentiated by the group members' perceptions of the directionality as well as the magnitude of the effect of decision flexibility on information value. Moreover, subjects' misperceptions of information value reflect individualistic models of information evaluation.