Introduction
In the corporate system, decisions and their timing have great importance. It is because decisions are the implementation of the strategy, which directly affects operations, revenue, and profit. Different companies have developed different systems and processes to take decisions (Caramela, 2017). Some of these systems and processes are simple, while others are very sophisticated and elaborate. These different decision-making mechanisms are devised to take such decisions, in which elements of risk are small (Cox, 2007). To reduce the size of the risk, in each decision, various variables or factors are emphasized. The traditional methods focus on selective factors, which directly influence the decision, and study them to reduce the size of the risk associated with risk. However, more contemporary decision-making mechanisms focus on additional information to reduce the risk (Lagner, 2006).
Studies suggest that traditional decision-making systems or mechanisms, such as cost-benefit analysis, cannot emphasize all the relevant factors that affect a decision (Baker, 2018). However, decision-making processes, such as Applied Economics Information process, can emphasize numerous factors and quantify them for decision-makers, making it easy for them to take difficult decisions (Hubbard D. W., 2014).
The AIE process of decision making is well-elaborated, and it includes probability related arithmetic. This arithmetic quantifies the worth/value of additional information. As the numbers are self-explanatory, decision-makers can take decisions with quiet ease (Hubbard Decision Research, 2018).
Some studies suggest the decision making is more important than the decision itself, which is why the emphasis has shifted towards the decision-making process (Latham, 2015).
Define the decision
A group, of investors intends to open a restaurant in the posh area of a city; an investment of $100, 000. All the top restaurants are concentrated in that part of the city, which has increased the economic/corporate value of the area. Also, it has increased the flow of customers in that area. The investment decision is in its preliminary stage, as the group of investors is still trying to emphasize as many factors as they can to reduce the element of risk.
The decision is important, as its investors would decide whether to invest or not. However, to make a decision, relevant information is required. Also, gathered information must be quantified to make the decision-making process easy. The Applied Economics Information process would start from the given/known information, and gradually more information would be added to it. Additional information would affect final decisions (to a certain extent) and the element of risk associated with it (reduce it).
The decision is regarding the investment whether a group of investors should invest in the restaurant industry or not.
Determine what you know
The piece of information we already have is that the restaurant business that is booming in part of the area. However, it is also a fact that very good restaurants (with enormous experience) operate in those sub-industry restaurants.
As per the preliminary analysis, the success rate, of opening a restaurant in that area, is 65%, whereas the chances of failure are 35%. If the restaurant is a success, it will earn a profit of $65, 000 in the first year. However, if it fails, it will lose $120, 000 (wages + profit not earned + winding-up of the business).
Calculation without any additional information
AIE =0.65*65000+0.35*(-120000) = 250
Compute the value of additional information
Additional Information 1
We learn that there are different types of restaurants which have different menus. Some of these menus, such as that includes, Japanese and Thai food, are more popular than the others. If we can device right/appropriate menu, this will increase the chances of success to 70%. However, if the right / appropriate menu is not devised, this would reduce the chances of success to 45%.
When Menu is Right (ideal)
AIE = 0.7*65000+0.3*(-120000) = 9500
When Menu Is Not Right (terrible/lack of information)
AIE = 0.45*65000+0.55*(-120000) = -36750
Additional Information 2
We also learn that because of the competition, the quality of food which the restaurants of this industry serve has also improved. Therefore, it is essential to serve quality food and restaurant can provide quality food, and the chances of success will increase to 77%. However, if it fails to provide authentic and quality food, its chances of success will reduce to 41%.
When Food is Authentic and of High Quality (ideal)
AIE = 0.77*65000+0.23(-120000) =22450
When Food is not Authentic and of High Quality (terrible)
AIE = 0.41*(65000) +0.59*(-120000) =-44150
Additional Information 3
We know, from the systematic observation, that when food is served timely, it increases the success rate to 68%; however, when it is not served at the proper time and dinners have to wait long for their food, it reduces the success rate to 57%.
When Food Is Served At A Time and Diners Do Not Have To Wait Long (ideal)
AIE = .68*65000+0.32*(-120000) = 5800
When Food Is Not Served At Time and Diners Have To Wait Long (terrible)
AIE = 0.57*65000+0.43*(-120000) = -14550
Additional Information 4
Another piece of information suggests that when staff (waiters) behave decently and appropriately with customers, it positively affects customer-company/restaurant relations and customers choose that restaurant most of the time. However, when staff is not-trained and behave impolitely with customers, it adversely impacts customer-company/restaurant relations. As per our estimation, decent and polite staff, which knows its obligations, increases the success rate to 66%, whereas ill-mannered, impolite or untrained staff reduces the success rate to 40%
Trained and Polite Staff (ideal)
AIE = 0.66*65000+0.37*(-120000) = -1500
Untrained and Impolite Staff (terrible)
AIE = 0.4*65000+0.6*(-120000) = -46000
Additional Information 5
Restaurants regularly revisit their menus in order to their service. The revisiting of the menu allows the restaurants to get rid of that dish/food, which are less liked or ordered. This action positively impacts the success rate. As per our projection, revisiting of menu, in a right interval will increase the success rate to 77%; whereas rare or no revisiting of menu will reduce the success rate to 62%.
When Menu Is Revisited frequently (ideal)
AIE = 0.77*65000+0.23*(-120000) = 22450
When Menu Is Not Revisited frequently (terrible)
AIE = 0.62*65000+0.38*(-120000) = -5300
(Note: It is essential to understand that whenever additional information is emphasized or focused, it is assumed that the restaurant is operating at 65%; between ideal and terrible.
Measure where information value is high
The AIE model, which we have created, considers 1) the value of information and the cost of ignoring it. In the absence of lack of information regarding the appropriate menu, the rate of success drops to 45%. Similarly, when restaurant staff lacks understanding regarding the quality and fail to provide quality food, the success rate drops to 41%. Therefore, the lack of information affects the success rate and thus the decision to invest in the restaurant industry.
To learn where information value is high, we have subtracted Value of Additional Information from the Lack of Additional Information. As per arithmetic, Authenticity and Quality of Food have the highest information value. If the restaurant has an understanding of quality and it can provide quality and authentic food, the success rates affect positively. However, if does not have information or understanding about quality (required) then the success rate gets affected quite adversely (information value is 66600).
The second highest information value is Right Menu. If the firm can devise a right or appropriate menu, the success rate increases to 70%; however, when such information is ignored, or the appropriate menu is not devised, the success rate declines to 45% (information value is 46250).
The third highest information value is on Trained and Polite Staff. According to the statistics, the information value, Trained and Polite Staff, is 44500. The fourth highest information value pertains to Revisiting of Menu. According to calculations, it is 27750, which makes it the fourth highest information value. The least high information value is 20350, which pertains to Food Served at Time.
This AIE model aids us to identify relevant factors or information, which may aid us in making critical decisions. For instance, the AIE model has helped us to decide on investment in the restaurant industry. It has assisted us in identifying factors or additional information, which may increase the chances of our hypothetical investment (Hubbar & Millar, 2014).
| Cost of Considering Information | Cost of Ignoring Information | Information Value | |
| 9500 | -36750 | 46250 | 1 |
| 22450 | -44150 | ||
| 5800 | -14550 | 66600 | 2 |
| -1500 | -4600 | ||
| 22450 | -5300 | 20350 | 3 |
| 44500 | 4 | ||
| 27750 | 5 | ||
Make a decision and act on it (or prepare a detailed action plan)
The known information was enough to convince investors to invest in the restaurant industry. However, additional information has made decision making easier. Emphasis on a particular factor or additional information is increasing the chances of success. For instance, by emphasizing on quality of food, which will be served in the hypothetical restaurant, will increase the chances of success to 77% and ignoring this information will reduce the chances of success to 41%. If we emphasize all the additional information, the chances of success will increase by more than 85%, which decide to invest easier. The decision is to invest in the restaurant industry and emphasize all the additional information, especially high-value information. In case the resources are few to emphasize all additional information, a group of investors can emphasize high-value information to increase the success rate.
Conclusion
In the end, it can be concluded that AIE process, which pertains to decision making, is simple and effective. It can quantify additional information, which directly affects the decision. In our case, it provided information, in empirical form, which may directly affect the chances of success of the restaurant. It is imperative to understand that there are various variations of AIE and all of these variants of AIE are effective and designed to provide maximum assistance.
In comparison to such other decision-making processes, such as cost-benefit analysis, it is more potent, as it can consider some variables or factors. Also, the AIE process evens that information or factor, which is considered trivial. Calculations about AIE process reveal that information, which is mostly ignored by other such decision-making systems and processes, is usually of great relevance and by not considering such information, a decision-making process becomes faulty.
References
Baker, M. (2018, January 1). Problems of Cost-Benefit Analysis. Retrieved July 20, 2018, from http://www.michael-baker.com/dissertation/chapter_9.html
Caramela, S. (2017, July 4). Techniques and Tools to Help You Make Business Decisions. Retrieved July 20, 2018, from https://www.businessnewsdaily.com/6162-decision-making.html
Cox, D. W. (2007). Frontiers of Risk Management: Key Issues and Solutions. Euromoney Books.
Hubbar, D., & Millar, M. (2014). Modeling resilience with applied information economics (AIE). Retrieved from https://cgspace.cgiar.org/bitstream/handle/10568/65242/Report%20no%208%20Modeling%20resilience%20with%20applied%20information%20economics.pdf?sequence=1
Hubbard Decision Research. (2018, January 1). An Overview Of Applied Information Economics. Retrieved July 20, 2018, from https://www.hubbardresearch.com/about/applied-information-economics/
Hubbard, D. W. (2014). How to Measure Anything: Finding the Value of Intangibles in Business (3 ed.). John Wiley & Sons.
Lagner, T. (2006). Negotiation, Decision-Making and Leadership to Corporate Success – Based on the example of Richard Branson and the Virgin Company. GRIN Verlag.
Latham, A. (2015, November 15). 12 Reasons Why How You Make Decisions Is More Important Than What You Decide. Retrieved July 20, 2018, from https://www.forbes.com/sites/annlatham/2015/11/15/12-reasons-why-how-you-make-decisions-is-more-important-than-what-you-decide/#4006d5ff7db8
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