Decision-making and Quantitative Modeling
What do all of these have in common?
They are models. They can be physical models such as a miniature model of an airplane, or of a
building, a globe, etc. Physical models are built to look like the real thing and to resemble the
larger object. Two dimensional models such as maps also show the shape of the object.
The second type of models are Analog Models. Analog Models try to represent something but
they do not look like the object they are modeling. For example, a thermometer is a model that
measures the heat in the room but it does not look like the heat. Other examples are
hourglasses, speedometers etc.
Finally, there are Mathematical Models. These are models that represent a certain object using
a mathematical relationship or equation. For example, Profit = Revenues – Expenses.
Rate of Return
Earnings per Share
Period of investment
Timing of investment
Zonal sales reps
Number of servers
Demand for service
What is a model?
A simplified representation or an abstraction of reality.
Physical models are simplified because they are smaller and have less detail.
Mathematical models look at the more detailed aspects and have an abstraction
o Validity (it should look like what it tries to represent)
o Usability (should be usable)
o Value (there is a cost associated in building it that we should get back)
Benefits of Modeling
Models enable the compression of time
Allow for easier manipulation than the real system
Lower cost that experimenting with the real system
Allows us to consider risk
Cost of mistakes is smaller
Models help us learn and understand the real system
The modeling process forces the use of rigorous thinking
Mathematical models let us analyze a large number of possible solutions
Drawbacks of Modeling
Can be time-consuming and expensive
Data collection can be expensive or impossible
It may be difficult to assess uncertainties
Oversimplification may produce poor results
Managers must agree to accept results
Common perception that if it is done on a computer, it must be correct
Uses of Models
o Used to find the best or optimal solution to a problem by
o Characterize things as they are
o Investigate outcomes and consequences
o Predict the behaviour of systems in certain situations
o Solutions are not necessarily optimal
o Sensitivity to the client
Expertise in quantitative business modeling
The Modeling Process
1. Opportunity / problem recognition
2. Model formulation
3. Data collection
4. Analysis of