Sensitivity And Decision -Making In Finance

Sensitivity and decision -making in Finance

Introduction

Regarding decision theory, it is mentioned that this is responsible for studying the way in which a person chooses some action, among a group of possible actions, seeking to lead to excellent results, depending on the preferences they have. These types of decisions are found in our daily lives, which has an affectation on us, and this related to formal issues leads to decision theory. That is, it is responsible for addressing individual or groups, analyzing different criteria in which a subject develops. In this way it is divided into two branches: the normative and descriptive theory.

Three types of decisions that serve the decision making are classified as: When we talk about the elaboration of economic analysis focused on the future, uncertainty and fear are presented at the time of making a decision on the alternatives, it is this uncertainty thatdefines the degree of sensitivity to which decisions are subjected. The sensitivity analysis shows how the value of a project changes by changing some of its key variables, while maintaining the value of other constants. There are two models to calculate the sensitivity analysis, van and IRR, the present value (van).

Developing

The internal performance rate (IRR) are two financial instruments of common use when an investment project is evaluated, usually in the medium and long term. The VAN gives us the opportunity to know if an investment project is profitable, but also if it has several investment projects, we can know which ones are more profitable and therefore more attractive.

The importance of sensitivity analysis is demonstrated by the fact that the values of the variables used to carry out the evaluation of the project may present deviations, which have a significant influence on the measurement of the results.

In turn, it allows to calculate variations in the VAN and IPR, with the aim of improving the quality of information that the possible investor of an economic project will receive. The use given to this instrument depends on the variations presented in financial information, this technique is used within certain limits that depend on one or more input variables, for example: effect of changes in interest rates(Independent variable) about bond prices (dependent variable). In financial analysis, the following project evaluation methods are considered the most used. 

But they also have their limitations, advantages and disadvantages. Therefore, it is recommended to take at least three for the decision to be based on more consistent results or trends. The five most used financial profitability indicators to evaluate investment projects are: present value, internal return rate, cost-benefit ratio, profitability index and reimbursement method. The first element of the analysis must be to calculate the cash flow or the net gain of each project. It should be noted that all numerical elements must have current value for calculations. 

Elements that make up a decision. In general terms it can be said that a decision is the ability of the human being to analyze an action and choose it from a broad set of possible options which can lead to a certain result, throughout life people are constantlyAnalysis to make a certain decision either from buying an article for the home to how to invest its capital to generate profits. That is why before making decisions, 5 fundamental elements must be taken into account. The first element to take into account is the collection of information.

It is necessary that they serve as the basis for decision making which can be obtained from primary and secondary sources. The second element is the previous knowledge that people obtain in the environment where the event or study is carried out by an example of this is when a traffic accident develops where the research agent investigates the event asked to peoplethat witnesses of this who can claim who was to blame in the accident while the investigations continue. The third element is based on the empiricism of the people of past events or investigations carried out.

It is the relationship between the current event with the past events which can provide a notion of what can really be happening, at this point the experience in study of an event or an investigation should be used becauseIt is based only on people’s experience leaving technical knowledge aside. The fourth element for decision -making is to analyze the data obtained from the collection of information together with the previous knowledge of people, relying on the experience of previous events.

At this point the options contemplated by the researchers are admitted or considered, finally, there is the decision that is nothing more than the results of the study of the problem or event where the best alternative managed and starting it is chosen, in statistics we also findthe decisions that are related to the managed sample where it is based on the subjectivity of the person in charge. Decision tree and possible results. Well, in clear terms, the decision tree is where the data is represented graphically which can give negative or positive results depending on the decision that has been made at that moment on an event.

This is known by its appearance, because it looks like that of a tree, this is a considerably useful tool because it gives us extensive use in the issue of decision making and also because it gives us consequently possible results. In addition, this is an analytical procedure where it shows us what are the best decisions we can make, when an inconvenience occurs in this, either because of some risk that is to commit the company or this prone to pass, it can also be given inAn alternative that will specify, that is, when they must accept or reject some function, these can be a project, a new brand that is going to the market, etc.

In decision -making there are always uncertainties which are usually quantified, that is, this occurs when there is an imperfection in some consultation or decision that you want to take on a specific topic, for example: the probability of success of a new product thatIt goes on the market, the opening of a new branch, the reduction of expenses, etc. The decision tree has many types of trees, and because of this we must find and interpret some of them in order to choose the one that best suits the information we have collected. Of course we must not forget one of the most important things in this method.

Which we always have to have as goals in increasing our sales nationally and internationally, maximizing profits, minimizing costs in all possible ways, among other things. In short, the decision tree is appreciated because in addition to being an analytical method and a graphic form, it is also a statistical technique therefore can be used in different areas. After all, the decision theory or better known as the parametric theory, which is to face a decision or action at the time of interacting with something that is presented to us, through which it goes through an arduous situation and work at the time ofSelect the best information available.

With the acceptance of driving better results that depend and divide the two types of normative and descriptive theory. The sensitivity analysis predicts the impact that some economic project can have at the time that changes in the important variables arise, in turn there is financial analysis makes it easier for us to make decisions thanks to the forecasts that are achieved when using the Van and Tir tools. The financial analysis uses as a basis for future economic estimates for decision -making, for these estimates, variables are submitted to a sensitivity analysis that would indicate what would be the reaction of the variable.

In turn, the evolution of the precise alternatives of a series of decisions, and to clearly define the alternatives, instruments are applied that help to understand the panorama, including the decision tree, the decision tree shows each variable and its possible consequence, this tool is vital in an economic analysis to mitigate or reduce the margin of error. In this research work, the concept of decision was analyzed and also and the elements that compose it as the collection of information, the analysis and the taking of the same. In the business world the decision -making process is supported by tools such as Van or the IRR.

Through its results you can know the impact and how sensitive some of the alternatives manage to make a good decision can be. Finally, a tree -shaped chart is made where all alternatives are raised with their respective results and their impact on the event which will help in making the best decision. In this present work we can analyze from the theory of a decision, the branches in which it is divided, its phases, a sensitivity analysis, its use, importance and the main components for a decision and as in each of them it is analyzedand each of the techniques that make much more reliable when taking it is used when.

As used in daily life either in the workplace or professional along with the help of the tree -shaped graph in which it can be observed more easily and clearly what it could cause, the impact it can have andthus help make the best decision. Well, in short, what we deal with in this research work is to make known each of the elements that influence a sensitivity analysis clearly and precisely because this is too important a topic when making decisions, sinceThis way we can solve some problem of these organizations.

There is endless methods for this but the most appropriate to use is the decision tree, because it is based on graphically showbad in our company. The sensitivity analysis is carried out to detect all the sensitive areas that occur when making an investment decision in the company;When deciding on an investment there is always some doubt about whether or not to do it and it is here the importance of this analysis in knowing the area in which it will affect and how affected it will be.

It should be stressed that within the methods of this analysis is the decision tree, important within the analysis of the performance variations. I conclude that decision theory is present in our daily lives, and its main approach is to be able to achieve excellent results based on a decision making a choice of possible options in an adequate and coherent way. Decision theory is divided into two branches, the regulations that examine each of the results of a problem;And the descriptive is the one that is oriented to the behavior of the individuals involved in a decision.

conclusion

The analysis of decisions has already been completed, we come to that in all types of business or company that there are problems, it is necessaryA process where tools are used that would help us more safely detect the solution we want to reach, in which we use a decision tree that is the most practical and gives us a successful decision. Decisions are very important for all matters of man’s life, to take them there are scientific and modern instruments.

The sensitivity analysis and the decision tree that contribute its application and better results based on the fact that decisions are taken in forecast and analysis schemes on the risks involved in the same. The main or primary work of people who occupy a prominent position in a company, or in daily situations of life, consists in solving different difficulties and making good decisions. Therefore, applying decision theory and its different phases is essential to have relevant results in the environment that we develop. This requires a lot of responsibility since it is a very important area and if we make incorrect decisions we will have a strong affectation.