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Wednesday, May 7, 2014

Improving Investment Decisions with Decision Making Models



Investment decisions can have a large impact on society. All investment decisions contain an inherent level of risk. This risk is associated with poor returns, loss of money, missed opportunities or even bankruptcy. Research by Wu , et. al. (2012) creates an analytical hierarchy process-group decision making model (IAHP-GDM) that works to complement group decision-making for more accurate investment decisions. 

The types of risks investment managers make are related to strategy selection, social risks, policy risks, credit risks, economic risks, technology risks, interest rate fluctuation, operational risks, and contract risks (Shen, 2009; Zavadskas, et. al., 2010).  Decision-makers should seek to understand these risks and attempt to encourage the best decisions possible. This can become even more difficult when higher volumes of information create confusion. 

These risks can be heightened when one person makes decisions based upon limited knowledge. In an investor’s perspective decisions move through four components that include problem recognition, information search, evaluation of alternatives and finally investment decisions (Shyng et. al, 2010).  Personal experience can be an enhancer or detractor in terms of bias within these decisions.

Some of the fallacies come from (Kim & Ahan 1997):

1. Lack of time, knowledge and data.
2. Difficult to quantify attributes.
3. A single decision maker that has limited knowledge, expertise, information processing ability, and an uncertain environment.
4. Limited expertise among group decision makers.

Decision-makers may feel pressure to make a decision but do not have the proper information nor do they have the expertise to make these decisions. This creates a problem that causes quick decisions to be made without an accurate analysis. When poor decisions are made they can impact a running chain of events that are difficult to change. 

The authors found that by using an analytical hierarchy process-group decision making model (IAHP-GDM) they were able Analytical Hierarchy Process-group decision making (IAHP-GDM) can foster greater group decision making. Group decision making can lower bias in decisions and help determine alternatives. Decision making models can help analyze those choices for greater accuracy and results.

Wu, W. et. al. Improved AHP-Group Decision-Making for Investment Strategy Selection. Technology & Economic Development of Economy, 18 (2).

Kim, S. H.; Ahn, B. S. 1997. Group decision-making procedure considering preference strength under incomplete information, Computer & Operations Research 24: 1101–1112.

Shen, C. (2009). A bayesian networks approach to modeling financial risks of E-Logistics investments, International Journal of Information Technology & Decision Making 8(4): 711–726.http://dx.doi.org/10.1142/S0219622009003594

Shyng, J. et. al. ( 2010). Using FSBT technique with rough set theory for personal
investment portfolio analysis, European Journal of Operational Research 201(2): 601–607.

Zavadskas, E., et. al. (2010). Risk assessment of construction projects, Journal of
Civil Engineering and Management 16(1): 33–46. http://dx.doi.org/10.3846/jcem.2010.03

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