Authors: Nutan Dehar
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Contemplating an organization\'s financial choices from an optimization standpoint is a common practice. When contemplating a lengthy duration, one must make decisions on the optimal financial framework and the optimal allocation of resources. The immediate priorities include mitigating the impact on cash flow, inventory levels, outstanding debts, accounts receivable, and existing obligations. Financial theory generally examines these possibilities from the perspective of finding the best answer. Researchers have proposed operations research approaches as prospective answers due to the optimality and problem-solving nature of these judgments. These methods have been introduced as effective solutions. This article explores the potential applications of multicriteria analysis in resolving practical issues related to financial decision-making.
When doing a financial study of an organization, such as a bank, insurance company, or corporation, the optimization principle is often considered. Throughout a substantial duration, a firm will encounter two separate categories of decisions: those pertaining to the most advantageous allocation of resources and those related to the most advantageous financial framework. Efficient management of short-term working capital requires making crucial choices on the best use of cash, commodities, accounts receivable, and short-term borrowing. These judgments are evaluated based on optimization in financial theory, which considers both the current and future aspects.[i] Some examples of these theories are portfolio theory, options theory, and the theory of capital cost. Due to this viewpoint, some scholars have suggested using operations research approaches to address problems related to financial decision-making. Constructing an optimization problem with explicitly specified restrictions, such as a problem aimed at maximizing or minimizing a certain objective, is a prevalent approach used in operations research to simulate decision-making difficulties. Exercise discernment and choose the optimal course of action, since it is the one factor of true significance.[ii]
Nevertheless, newer studies have adopted a more thorough and practical approach to examining these financial challenges, surpassing the constraints of the optimization paradigm in the process. When discussing issues related to capital budgeting, it is crucial to consider the following:
In a distinct but comparable study, researchers reached the conclusion that the primary aim of microeconomic theory aligns with that of any other theory: to aid firms in optimizing their profits while concurrently increasing the satisfaction that individual consumers get. Experts have three primary criticisms regarding the utilization of the single objective function principle by companies:
a. Alternative approaches, such as enhancing stockholder wealth, rely on more straightforward assumptions and offer a more comprehensive explanation of real-world scenarios.
b. Monetary capitalization, or some else comparably simplistic theory, is inadequate in explaining the intricate decision-making process.
c. Actual companies do not employ the only aim perspective way.
Moreover, there has been a plethora of novel concepts about businesses, each aiming to achieve distinct objectives from the traditional microeconomic theory. Several of these hypotheses have emerged in the last several years.[iii]
Based on these findings, we may identify three main justifications for the need to modify the approach employed to simulate financial difficulties.
The primary aim of this research is to examine and analyze the role of multicriteria analysis in addressing and resolving financial decision-making issues. The process of performing a multicriteria analysis is outlined in Section 2. The third segment focuses on examining the multifaceted nature of various financial circumstances. In Section 4, we provide a comprehensive analysis of the benefits of using multicriteria analysis in financial management. Additionally, we propose prospective avenues for further study on the use of this technique in banking and other commercial settings.[iv]
II. THE MULTI-CRITERIA ANALYSIS METHODOLOGY
The phrase "multicriteria decision aid" (MCDA) encompasses a range of techniques that integrate many evaluation criteria to streamline the process of selecting, prioritizing, organizing, or characterizing a set of choices. The European School uses the term multiple criteria decision making (MCDM) to describe this procedure, whereas the American School refers to it as multicriteria analysis (MCDM).[v] Furthermore, it examines the manner in which decision support systems impact a specific decision maker, whether it is a person, a group, or an organization. The book, published twenty-seven years ago, used the phrase "multicriteria decision help" to delineate the process of creating this kind of decision assistance. To provide decision-makers with tools that aid them in handling complex choice situations, such as picking investment initiatives for a company, which involve considering several conflicting aspects.
Regarding MCDA, professionals possess the ability to differentiate among a wide range of diverse methodologies. Undoubtedly, the distinctions between these categories are not as apparent as they need to be. Experts also proposed a variety of methods, outlined as follows. We support the following strategies:
In this research, we use the categorization approach proposed by these experts. The four specified categories are the priority disaggregation method, the outranking relations approach, the multiattribute utility theory, and the multiobjective mathematical programming.
Multiobjective mathematical programming is characterized by the use of a vector of real variables (x1, x2,..., xl) to represent an action or alternative, setting it apart from other programming languages. The set D of feasible solutions is sometimes determined by a combination of differentiable and continuous obstacles. The user's text is incomplete and does not provide any information. Multiobjective linear programming utilizes linear constraints to determine the set D. Some examples of linear constraints are:
It is important to note that the order in which these four actions are outlined does not necessarily need to be sequential. Feedback may be received via communication between the analyst and the decision maker, therefore the process of decision assistance does not have to follow a linear evolution. The vast majority of multicriteria techniques that have been implemented may be attributed to this comprehensive framework.
C. The Multi-criteria Nature of Some Monetary Issues
Strategies for handling working capital involve various methods such as:
These approaches are used to effectively handle working capital.[i]
If you encounter this situation, addressing your money problems will be easy. At its core, it is based on a problem that is clearly expressed in a way that is strongly connected to the current time and assessed according to a certain standard (in this case, the monocriteria paradigm). However, it is crucial to remember that the modeling of financial issues utilizes a unique logic. They should bear in mind the following concerns while responding to such a circumstance:
a. participation of individuals responsible for financial decision-making in the review process
b. The occurrence of a situation where the criteria are contradictory
c. The presence of an evaluation system that is complex, subjective, and poorly organized; and the existence of a significant number of criteria.
The MCDA has made substantial advancements in tackling a diverse range of financial matters, encompassing credit assessments, venture capital funding, bond evaluations, country and political risk assessments, evaluations of organizational performance and sustainability, investment choices, financial planning, and portfolio management. In the following discussion, we will analyze two matters that emerge throughout the process of making financial choices: portfolio management and investment selection. This will demonstrate the many intricacies that are linked to financial concerns. The use of optimization algorithms in these two fundamental domains of financial management offers a vast array of potential applications. However, as we shall see in the following discussion, these strategies just aim to streamline intricate real-life situations and highlight the intricate nature of these important financial choice issues.[ii]
D. The Choice to Invest
The process of selecting investment projects is a crucial decision-making activity for all organizations, irrespective of their origin (public or private) or size (big or small). Investment decisions are strategic and crucial due to the substantial time, financial resources, and effort involved. The process of choosing an investment should not be difficult as a result. Due to the existence of four main phases in the investment selection process (perception, formulation, assessment, and selection), the use of financial theory is limited to the latter two stages. Financial theory involves the use of empirical financial measures, such as profit returns as well as the payback technique, as well as more intricate measures derived from discount methods. The criteria include the current balance, intrinsic profits , profitability rates, reduction even methodologies, and several others.[iii] Hypothesis of finance suggests indexing potential investment projects from highest to lowest quality or, in the case of a single project, evaluating and deciding whether to accept or reject it individually. This scenario arises when there are several prospective investment initiatives. Despite efforts to modernize financial theory by including simulations, game theory, and CAPM to include time, inflation, and risk, challenges persist in assessing and selecting investment projects. Key features of the investment process include option in a price cut value, mess among monetary metrics (such as current balance and intrinsic return values), and constraints of holding theory of money when considering a sequence in financial pipelining (that is underpiped and outpiped). As per financial theory, the discount rate, also known as the rate of return, serves as the threshold or criterion for accepting or rejecting investment projects when using the internal rate of return criteria. The discount rate is the only determinant of a company's investment choice. Considering the potential conflicts between criteria, it is likely that rankings for items meant to measure project profitability, such as the profitability index and net present value, or the internal rate of return and net present value, may differ as well. Therefore, the use of a financial strategy in the decision-making process for investments seems to be limited and unattainable. The project is now in the first stages of evaluation and selection, with a primary focus on financial considerations. This approach, however, limits its practicality and restricts its potential impact.
E. Managing a Portfolio
Experts investigate the issue of international portfolio selection. According to them, in a scenario of worldwide diversity, the conventional optimization model of portfolio selection utilized in a national context may be even more likely to be suboptimal. In reality, in an international setting, the M-V model is not always a good strategy since it does not include all of the variables that portfolio managers and investors use to make stock investment choices. [iv]The authors propose new criteria for such decisions, such as the monthly return over the last five years, the standard deviation of the return calculated over the last five years, the total cost of transactions, the country risk (or political risk), the direct available coverage for foreign currencies, and the exchange risk. The multicriteria technique employed (i.e. ELECTRE IS, ELECTRE III) has the benefit of providing the portfolio manager with a vast collection of investment options while also allowing him to choose the relative relevance of the various criteria throughout the portfolio selection process. Past research has mostly examined these financial challenges using multivariate statistical techniques, including discriminant, logit, and probit analysis.
These techniques recognize that multiple factors influence financial decision-making, but they frequently lack the necessary support and neglect the preferences of decision-makers (some models completely disregard the physical or economic importance of the parameters). Upon this insight, scholars in the disciplines of operations and finance embarked on a quest to discover novel methodologies for carrying out routine tasks. Previous discussions have shown that MCDA has been used in many situations and using various approaches.[v]
The study\'s results showcased the efficacy of MCDA in addressing the common difficulties associated with making sound financial decisions. All of these difficulties were previously addressed in the realm of finance theory from the very focused perspective of optimization. Given the optimality of these issues, some scholars have suggested using operational research approaches as a possible remedy. The methodologies include classical modeling and monocriteria modeling. The authors discussed key factors that highlight the need of using MCDA methodologies to evaluate financial decision-making challenges within a multidimensional framework. The major topics were examined via the use of case studies encompassing investment selection and portfolio administration. The following paragraphs provide a succinct overview of the primary benefits that MCDA approaches offer to the field of financial management. In conclusion, MCDA techniques are likely going to be having a bright light in case of monetary scheduling due to its realistic and demanding framework for decision concerns. However, it is crucial to build enhanced automated decision support systems that consider several elements in order to effectively execute these techniques in real-world scenarios. The complexities of financial decision-making are well recognized by firms and banks. However, due to the easy availability and affordability of optimization and statistical tools, individuals often use these methods to tackle their financial challenges. However, it should be noted that a significant number of these tools are not specifically developed to address the complexities associated with financial decision making. Therefore, in order to make real-time financial judgments, it is necessary to employ integrated multicriteria decision support systems that are specialized and user-friendly, which involves the implementation of MCDA techniques.
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