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What are the various theories of Decision Making?

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The different theories that are related with decision making are as follows:-

1. Marginal Theory: in case of this theory, the emphasis is on increasing the profit. According to the advocates of this theory, profits can be increased when the marginal costs of inputs are the same as the marginal revenues. In this regard, the marginal cost is the additional cost of producing an additional unit and on the other hand, the marginal revenue is related with the extra revenue achieved from such a product. Therefore, in case of a difference between the marginal costs and revenues, maximum profit cannot be achieved. In such a case, either additional revenue will be generated at less additional costs or vice versa. However, it has been seen that it is very difficult to find the marginal point for each factor of production because the cooperation of every person is required for carrying these functions.

2. Psychological Theory: In case of this theory, the emphasis is on the maximization of customer satisfaction. According to this theory, the manager plays the role of an ‘administrative man’ instead of being an economic man. Therefore, the manager tries to protect the economic interests of the organization and at the same time, efforts are made to increase customer satisfaction. The manager selects a particular alternative that is also capable of helping the customers. Therefore, the psychological theory provides that the interests of the consumers should always be kept in mind while taking a decision.

3. Mathematical Theory: In mathematical theory, various models are used. Therefore it is also called the operations research theory. Generally the techniques that are used in mathematical theory include linear programming, network theory, Monte Carlo technique, simulation models etc. In this case, the analyst defines the problem and uses symbols for unknown data and then makes efforts to solve the problem. As compared to the other theories, mathematical theory is much more systematic.

This article has been written by KJ Singh a MBA Graduate from a prestigious Business School In India
Article Published:April 2, 2016
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