IMS555 Decision Theory Topic 1

Introduction to Decision Theory

• Decision theory is a body of knowledge and related analytical techniques designed to help a decision maker choose among a set of alternatives in light of their possible consequences.
• It deals with human decision making in the extent of insufficient information and incomplete control over events.
• Decision theory answers theoretical problems, focusing on unstructured/ill-structured problems.

Decision Making Process

• Decision making is the process of selecting a course of action from multiple alternatives.
• It is a cognitive process that involves awareness, perception, reasoning, and judgment.

Decision Theory

• Decision theory is an interdisciplinary field that involves economists, statisticians, psychologists, political and social scientists, or philosophers.
• It explains principles, methodologies, mechanisms, and supports required for reaching a justifiable decision.
• Decision theory is about making a rational choice from a set of possible actions and deals with methods for determining the optimal course of action when a number of alternatives are available.

Structured and Unstructured Problems

• Structured problems can be described by existing classic mathematical models, and the procedures for obtaining the best solution are known as standard solution methods.
• Unstructured decision problems are fuzzy, uncertain, and vague, with no standard solution method; human intuition is often the basis for decision making in such problems.
• Decision theory focuses on unstructured or ill-structured problems, which are worth attending to, and excludes straightforward and structured problems.

Normative Decision Theory

• Normative decision theory is a theory about how decisions would be made, attempting to find the best solution to a decision problem.
• It is based on formal logic and probability theory as rules to follow that supposedly make our thought rational.
• This theory assumes an ideal decision maker who is rational with access to perfect information and not confined by natural human limitations.

Descriptive Decision Theory

• Descriptive decision theory is an explanation of how decisions are actually made and what people are observed to do when making decisions.
• It attempts to explain and uncover the behavior of people (strategies and cognitive processes) in realistic decision scenarios.

Prescriptive Decision Theory

• Prescriptive decision theory aims at optimization but considering human limitations to process information.
• It takes into account emotional, motivational, and other non-rational effects due to human vulnerabilities to emotional and motivational states, and are error-prone.
• This theory prescribes techniques for aiding decision making, bridging the gap between descriptive observations of the way people do make choices and normative guidelines for how they should make choices.

Human Characteristics in Decision Making

• Realist: inclined to literal truth and pragmatism
• Optimist: disposed to take a favorable view of things
• Pessimist: expecting the worst possible outcome
• Opportunist: takes advantage of any opportunity to achieve an end

Conclusion

• Decision theory is a body of knowledge and related analytical techniques designed to help a decision maker choose among a set of alternatives in light of their possible consequences.
• It deals with human decision making in the extent of insufficient information and incomplete control over events.
• Decision theory answers theoretical problems, focusing on unstructured/ill-structured problems.
• Normative theory explains how decisions would be made, descriptive theory explains how decisions are actually made, and prescriptive theory prescribes techniques for aiding decision making.

Introduction to Decision Theory, understanding the concept, issues and approaches including normative and descriptive methods.