Decision Making Theories & Concepts

8/6/2019 Decision Making Theories & Concepts

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Decision MakingTheories and

Concepts


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Decision Theories

Interdisciplinary area of study that

concerns analyses of decisions and their

consequences of mathematicians,statisticians, economists, philosophers,

managers, politicians, psychologists and

anyone else (Annisimov, 2011).


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GAME THEORY

Study on how strategic interactions among

economic agents produce outcomesbased on the preferences/utilities of those

agents (Ross, 2010).


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Game Theory

Outcome depends on the decisions of two

or more decision players, where no singledecision maker has full control over the

outcomes (Kelly, 2003).


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Game Theory

Agent acts based on rationality, rationality

is the maximization of ones payoff, thus

the agent always act to gain as much aspossible, regardless of how if affects

others (Scheve, 2011).


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Basic Elements

Utility subjective welfare that an agent

obtains from an object or an event

Agents act in order to maximize utility(Samuelson, 1938)

Game situations which involve an agent

in maximizing his utility by anticipating the

responses to his actions by one or more

other agents


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Basic Elements

Choice

- generally fixed; large choices makes

practical analysis more difficult Payoff

- commonly measured by money

Players- opponents


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Classifications

Games of Skill

Games of Chance

Games of Strategy


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.Game theory

Sequential move vs. Simultaneous move

Sequential Game trees (backwardinduction reasoning)

Simultaneous Matrices (show

outcomes)


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Game Theory

Prisoners Dilemma


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A winning strategy in competitive

games should have a random

component so that the opponentcant anticipate ones moves

(Parlin, n.a).


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Salient Criticism..

Not all the factors are accounted for in

defining, limiting and isolating the

variables that influence strategy and

outcome


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Public Choice Theory

James Buchanan and Gordon Tullock

- Primary developers of the theory on their

book Calculus andConsenton 1962

William Riker

- Founder of the field


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Study of politics based on economic

principles (Felkins, 1997)

Transfers the rational actor model of

economic theory to the realm of politics

(Shughart II, 2008).


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Related to Game Theory, SocialChoice

Theory, andPositive Political Theory

Assumes that people act based on self-interest and utility-maximization

voters vote for candidates that will make

them personally better off; bureaucrats

strive to advance their own careers


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Explains how political decision making

results in outcomes that conflict with thepreferences of the general public (Parlin,

n.a)


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Pulblic Choice Theory

Elections

Legislatures

Bureaucracies

Rent-Seeking


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Lessons

Changing the identities of public figures

will not produce major changes in policy

outcomes

Electing better people will not lead much

to a better government

Men are not angelsthey pursue their on

objectives


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In framing a government which is to be

administered by men over men, the great

difficulty lies in this: you must first enable

the government to control the governed;

and in the next place oblige it to control

itself (Federalist, no. 51 as cited in

Shughart II, 2008).


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Causal Decision Theory

A rational agent should choose that action

which among all the alternatives has the

maximum expected value (Armendt,

1986).

Recommends an option that maximizes

utility, whose utility equals or exceeds the

utility of all the other options (Weirich,2008)


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Contrasts Evidential Decision theory which

concerns on conditional actions which theagent expected to bring the best outcome.


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Expected Utility

The probability-weighted average of its

possible outcomes' utilities

Possible states of the world that are

mutually exclusive and jointly exhaustive,

and so form a partition, generate an act's

possible outcomes


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Expected Utility

Ex. Studying and Passing

EU(S) = P(P ifS)U(S& P)+ P(~P ifS)U(S& ~P)

EU determines the action of the agent


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Causation of the action entailscorrelation, but correlation does

not entail causation


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A good decision aims to produce a good

outcome rather than evidence of a goodoutcome; CAUSAL DECISION THEORY

aims for the good and not just signs of the

good (Weirich, 2008).


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Prisoners Dilemma (from Game theory)

What shall the

prisoners do?


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Criticisms

Newcombs Paradox

- portrays conflict between causal and

evidential decision theory

Probabilities of conditionals

- situations considered as causal mightactually be conditional


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Evidential Decision Theory

Choosing the action with the highest

expected utility (Grafstein, 1991)

Contrasts Causal Decision theory

- requires causal connection between

actions and desirable outcomes


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Expected Utility Hypothesis

EDT is concerned on Expected Utility

- states that the agent chooses between

risky or uncertain prospects by comparingthe expected utility values (Mongin,

1998).


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Expected Utility Hypothesis

When agents are forced to make choices

under uncertainty, they do so bymaximizing the expected utility (Allen

,1987)


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maximization of the expected utility (V )of

an action (A) through the calculation of

conditional probabilities (Harper, 1981)


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Causation is difficult, information can be

directly obtained from probabilistic

information

Correlation fuels EDT

Correlation is easier to figure out that

causation


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Allows reaching to a correct decision

without relying on any complex causalapparatus


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Major Criticisms....

An irrational policy of managing the news

(Lewis, 1981)

"Rational agents choose acts on the basis

of theircausal efficacy, not their

auspiciousness; they act to bring

aboutgood results even when doing so

might betoken bad news. (Joyce, 1999)


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HenceDecision Making Theoriesinvolves a wide variety of methods in

analyzing, explaining, and even guiding

the future actions of the decision maker.

However, despite the encompassing

nature of the DMT, there still remainsunknown factors that the DM has to get

through himself.


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Decision Making Theories & Concepts