The Decision Making Process How to Make Better, More Effective Decisions

Making Decisions Each day, we all make decisions. Most decisions are simple, such as, “What should I wear?”, or “What should I eat?” Other decisions are more complex, such as, “Should I buy a new or used car?”, or “Should I go to college or university?” In order to make these more complex decisions, it is important to practice the steps of an effective decision- making process. This will ensure that you make an informed decision. As your decision-making skills are used and improved, your quality of life can be enhanced; wiser choices result in better use of time, money, and other resources.

Factors that Can Influence a Decision Values are attitudes, ideas, and beliefs about what is important; your personal values guide the way you live. Values are influenced by factors such as your cultural upbringing, religion, the attitudes of your family and friends, what you see in the outside world (TV, newspaper, school, etc.), and what society promotes as important. A responsible decision will depend on, as well as reflect, your values. When making a decision, you may additionally be influenced by . . . Family: What would your family prefer? What have members of your family done when in a similar situation? Peers: What expectations do your friends and peers have? These can both positively and negatively affect your decisions. Age: How old are you? The stage at which you find yourself in life will play a big role in how you make decisions. Habits: What are you accustomed to doing? Are you willing to make a change? Feelings: How will you feel if you do or do not make a certain decision? (eg., love, anger, frustration, ambivalence, rejection, etc.) Risks and Consequences: What do you stand to win? What do you stand to lose?

How does an individual make an informed decision?

Step 1: Identify the Problem Examine the situation and ask yourself, “What decision(s) need to be made?”

Step 2: Consider Your Choices What are the possible choices you could make? Consider both positive and negative options at this stage, listing as many possibilities as you can. Remember that sometimes the best decision is NOT to take action, and include this in your list if applicable.

Step 3: Gather Information Based on your list of options, spend some time researching each scenario. Don’t be afraid to ask for advice or input at this stage! Consider speaking to people who have made similar decisions, or been in similar situations.

Step 4: Consider Advantages and Disadvantages Consider the pros and cons of each option in terms of how the final result will directly impact you, as well as others in your life. Ensure that you consider both the immediate and long term consequences of each decision.

Step 5: Make Your Decision Use all the current information you know and have gathered to make a responsible decision. Remember that careful thought and preparation are the cornerstones of making a good decision.

Step 6: Evaluate Your Decision After you’ve made a decision and taken action, reflect on what happened. Ask yourself . . . What was the outcome? How did the decision affect you and others? What did you learn from the decision? Would you make the same decision again? If not, what would you change?

Decision-Making Case Study Based on the information just presented, you will work in groups of five to put the decision-making process into action. Using the scenario provided, work through each step of the process to make a decision. Ensure that you generate at least seven potential choices. Gather information about possible solutions to the problem from a wide variety of sources. Consider the advantages and disadvantages of three of your best options. Evaluate the decision based on what you anticipate the results to be, accounting for both positive and negative outcomes.

How does an individual make an informed economic decision?

Economic Factors that Can Influence a Decision People are usually not aware of economic influences that can affect decision making. These economic influences include . . . Consumer Prices: changes in the buying power of the dollar; inflation Higher prices result in more expensive goods and services, and lower buying power of the dollar. Consumer Spending: demand for goods and services Increases in consumer spending for certain goods and services result in additional jobs in those industries. Gross Domestic Product (GDP): total value of goods and services produced within the country A growing GDP usually indicates expanded economic growth in a country. Housing Starts: the number of new homes being built Increased home building usually leads to more job opportunities and expanded consumer spending. Interest Rates: the cost of borrowing money Lower interest rates encourage consumer spending; higher rates are likely to encourage saving and discourage borrowing. Money Supply: funds available for spending in the economy A larger money supply will usually result in lower interest rates. A smaller money supply will likely result in higher interest rates and reduced consumer spending. Stock Market Index: indicates general trends in the value of stocks (e.g., Dow Jones Averages, NASDAQ, TSE 300) Higher stock prices usually indicate confidence in the economy and strong business conditions for jobs and consumer spending. Unemployment: the number of people without employment who are willing to work High unemployment reduces consumer spending and results in fewer job opportunities. Before you make decisions about money, you must understand how economic factors may impact personal and financial decisions.

Economic Factors that Can Influence a Decision Changing economic factors influence the decisions we make. Using the two articles provided at your table, as well as any additional Internet research you wish to conduct, record a few points about recent trends that influence various saving, investing, spending, and borrowing decisions. Next, assess the ways in which these trends could influence personal decisions when it comes to finances. For example, higher interest rates might make borrowing money – such as to finance a new car – less appealing. However, higher interest rates may also encourage an individual to save more. You may work individually, or with the students at your table. Be prepared to share your answers with the class.

Economic Risks that Can Influence a Decision Making choices about money can be risky. The following are common risks that you should think about related to personal and financial decision making: Income Risk: Changing jobs or reduced spending by consumers can result in a lower income or loss of one’s employment. Career changes or job loss can result in a lower income and reduced buying power. Inflation Risk: Rising prices cause lower buying power. Buying an item later may mean a higher price. Interest Rate Risk: Changing interest rates affect your costs (when borrowing) and your benefits (when saving or investing). Liquidity Risk: Certain types of savings, guaranteed investment certificates (GICs), and investments (eg., real estate) may be difficult to convert to cash quickly. Personal Risks: These are factors that may create a less than desirable situation. Personal risk may be in the form of inconvenience, embarrassment, safety, or health concerns.

Opportunity Costs and the Time Value of Money It is good practice to weigh the pros and cons of pursuing a particular course of action. After careful cost analysis, people can determine whether the advantages outweigh the disadvantages, and a decision can then be made. Opportunity Costs: Refer to what a person gives up when a decision is made. This cost, also called a trade-off, may involve one or more of your resources (time, money, and effort). Personal Opportunity Costs: These may involve time, health, or energy. For example, time spent on studying usually means lost time for leisure or working. However, this trade-off may be appropriate since your learning and grades will likely improve. Financial Opportunity Costs: Involve monetary values of decisions made. For example, the purchase of an item with money from your savings means you will no longer obtain interest on those funds. Time Value of Money: Can be used to measure financial opportunity costs using interest calculations. Calculation $1,000 x .04 (4 percent) x 1 year = $40 Over 10 years, that $40 a year (saved at 4 percent) would have a value of over $480 due to compound interest. Example Spending $1,000 from a savings account paying 4 percent a year means an opportunity cost of $40 in lost interest.

Making Financial Decisions Assignment Based on the information you have learned about decision-making, economic influences, and opportunity costs, you will analyze three financial problems to determine the best course of action for each. Focus specifically on the economic factors (large, medium, and small scale) when making your decision, listing as many points as possible. While you do not need to write out the Six Steps of Decision-Making for each scenario, don’t forget the principles addressed in this model – they’ll help you to better organize your ideas. Use the sheet provided to start listing your ideas before typing out a final good copy. Computers have been booked for this on Friday, May 26th. This is an individual assignment that MUST be completed as part of your Culminating Unit. Use your time wisely!