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The Decision-Making Process in Foreign Real Estate Investments

Example from the Swedish and Montenegro Residential Market

Written by M. Balsic

Paper category

Master Thesis


Architecture & Real Estate




Master Thesis 3. Decision-making theory International investment precedes the long-term and thorough decision-making process. This especially applies to investors who have never experienced a particular foreign market. There are still no specific models or rules on how to make foreign investment decisions. Investment decision theory is to select aspects of the influence process or define the rough motives of the influence process. Each specific case is different, and the results obtained by evaluating opportunities and risks are also different (Chernysheva 2011). Nevertheless, both decision theory and investment theory have a certain explanatory power, and point out the stages, processes, reasons and motives of making decisions in a specific way. Modern decision theory originated in many disciplines such as economics, statistics, politics and social sciences, and psychology, and was mainly developed in the middle of the 20th century. Decision theory is divided into normative and descriptive. The first is about how decisions should be made, and the second is about what they actually make (Hansson 2005). Normative decision-making theory presupposes rational decision-making process, although it does not define what “rationality” means. When applied to foreign investment, one can assume that "rationality" means diversifying risks or maximizing profits. How to deal with the problems of uncertainty and lack of information when investors have clearly defined their rational goals. Descriptive theory analyzes and describes the methods used for decision-making. It may contain more beliefs and behaviors, but it proves that this process is not always "rational." Although in theory, the difference between normative and descriptive is not clearly defined, it can be concluded that normative theory develops from descriptiveness. Failures in investment decisions can be analyzed and improved to avoid similar mistakes in the future. Still considering the rapid changes in the global economy, the speed and method of information flow, or currency fluctuations, it is obvious that uncertainty and ambiguity will always be found. 3.1. Decision-making process Decision is a process, which means that it includes a period of time, so the theory of the stages of the decision-making process divides it into sequences. The French philosopher Condorcet (1743 -1794) defined the main stages of the decision-making process: the first stage "discusses the principles that will be the basis for general problem decision-making; one person examines all aspects of the problem and the consequences of different decision-making methods. "In the second stage: "The problem is clarified, and the opinions are close and combined with each other to form a few more general opinions." (Condosset), [1793] 1847, pp. 342-343) Therefore, the decision process theory was developed by Mintzberg, Raisinghani, and Théorêt (1976), who developed non-sequential models. They adjusted Simon's three stages to make them independent of the sequence. Two routines have been identified for the recognition or "smart" phase, namely decision recognition and diagnosis. Here, “problems and opportunities” are identified and “in the vague, mostly verbal data stream received by decision makers” and “using existing information channels and opening up new channels to clarify and define problems” (Ibid., page 19). 253-254). Considering that information channels are more extensive and the speed of information exchange has also been greatly accelerated, the decision-making process is likely to return to this stage more frequently today. The development phase includes search and design procedures. They include looking for options, one of which refers to existing solutions and the other to create new alternatives or adjust existing ones (Hansson 2005). Finally, the selection phase is used for screening, evaluating selection and authorization procedures. For the first suggestion, “when it is expected that the search will produce more ready-made alternatives than the centralized evaluation” (Mintzberg, Raisinghani, and Théorêtp. 257). The evaluation selection routine is described in detail later as a separate stage, which will be discussed later. The authorization procedure refers to the selection of a solution as the final decision. The design phase takes up most of the executor's time, followed by intelligence activities. Select the activity using Thesis the smallest score (Simon 1960 p.2, Mintzberg1976). The theoretical literature still emphasizes evaluation and selection procedures. This is considered to be the core of the decision-making process. But even if the other routines are mainly determined by the evaluation and selection routines, their importance is not insignificant (Hansson 2005). It is possible that the time consumption of routines in different disciplines is different. Decision identification and diagnosis may be of great significance in decision making where problem identification is the primary task. The investment decision-making process usually starts with identification, such as the size of the fund, the expected return, or whether it is ready to take risks. 3.2. Decision-making and evaluation The goal of the decision-making process is to select the "best" alternative. What is the best choice depends on personal criteria. The choice of value standard is tested in the theory of moral philosophy. The value of alternatives can be expressed in the following ways: relationship and numbers, comparative value terms, completeness, transitivity, preference, number representation and utility (Hansson, 2005). If you choose among different alternatives A, B, and C, the value criterion may be related to low risk or high rate of return. Read Less