IMS555 Decision Theory Introduction PDF

IMS555 Decision theory Topic 1 Introduction Objective After studying this chapter, you should be able to: 1. Understand the concept of Decision Theory 2. Understand issues about the nature of decisions 3. Describe the concept of normative approach of Decision Theory 4....

IMS555 Decision theory Topic 1 Introduction Objective After studying this chapter, you should be able to: 1. Understand the concept of Decision Theory 2. Understand issues about the nature of decisions 3. Describe the concept of normative approach of Decision Theory 4. Describe the concept of descriptive approach of Decision Theory  Decision  A resolution arrived at after consideration.  A choice made between alternative courses of action in a situation of uncertainty.  A choice or judgement that one make after thinking and talking about what is the best thing to do.  Decision making  Decision making is the process of selecting a course of action from multiple alternatives.  The process is cognitive which involve awareness, perception, reasoning and judgement.  Theory  A supposition or a system of ideas intended to explain something.  A set of assumptions, propositions, or accepted facts that attempts to provide a reasonable or rational explanation of cause and effect (causal) relationships among a group of observed phenomenon. Development of a theory  Decision theory  Decision Theory is theory about decisions, which explains principles, and methodologies, mechanisms and supports required for reaching into a justifiable decision.  Decision theory is about making a rational choice from a set of possible actions.  Decision theory deals with methods for determining the optimal course of action when a number of alternatives are available. Decision theory is a body of knowledge and related analytical techniques of different degrees of formality designed to help a decision maker choose among a set of alternatives in light of their possible consequences. ~ (Web Dictionary of Cybernetics and Systems) Making a rational choice  Decision theory is interdisciplinary  Decision theory is typically pursued by researchers who identify themselves as economists, statisticians, psychologists, political and social scientists or philosophers.  Decision, theoretical question and problem  There must be some theoretical questions in the ground prior to making decision.  The theoretical questions are problem that requires resolution; since there would be no decision without problem.  Example of theoretical question  What would I dress to lecture today?  The decision made would depend on the frequent use of apparel, availability and readiness and perhaps suitability with activities to be conducted in the lecture  Example of theoretical question  Should I purchase imported or local car?  Issues such as pride, price and value, maintenance, loan facility and other considerations will significantly influenced the purchasing decision. Structured and unstructured problem Structured Unstructured A structured problem can be described by Unstructured decision problem is fuzzy, existing classic mathematical models, such uncertain and vague, to which there is no as linear programming and statistic methods. standard solution method. The procedures for obtaining the best Human intuition is often the basis for solution are known as standard solution decision making in an unstructured problem methods. Programmed decision - a repetitive Non-programmed decision - decision that decision the can be handled by a routine is nonrecurring and generate unique approach responses. Examples of structured problems are Example of unstructured problems include selecting a product which has the lowest planning new services (unknown market and price among all the same type of products external environment that can affect the new (because we know all the products and their services). prices) Source: Li Niu, Jie Lu and Guangquan Zhang (2009). Cognition-Driven Decision Support for Business Intelligence: Models, Techniques, Systems and Applications. Springer.  Decision theory and unstructured problem  Decision theory focus on unstructured or ill-structured problem which is worth attended; and exclude straight forward and structured problem.  Decision theory is concerned with goal-directed behaviour in the presence of options.  With the idea that in any unstructured situations or problems, there exist a set of alternatives to choose from and one chooses in a systematic way, not in random.  Normative Decision Theory  A normative decision theory is a theory about how decisions would be made.  It attempts to find out the best solution to a decision problem.  Known also as rational decision theory, this type of theory is about how decision would be made in order to be rational.  These theories are based on formal logic and probability theory as a rules to follow that supposedly make our thought rational.  It assumes an ideal decision maker who is rational with access to perfect information and not confined by natural human limitations.  The goal of normative decision analysis is to develop models for optimal decision making which have logically, rationally and morally compelling properties  Rational and optimal decision  Rational - Consistent with reason or based on reason (logical).  A rational decision is a decision which is made in a consistent way to achieve your goals based on evidence or information.  A rational decision is one that is not just reasoned, but is also optimal for achieving a goal or solving a problem.  Optimal decision is an effective decision with highest achievable outcome under given constraints.  Descriptive Decision Theory  Descriptive theory is an explanation on how decisions are actually made and what people are observed to do when making decision.  The descriptive branch of decision theory has its roots in human behavioural research  It attempts to explain and uncover the behaviour of people(strategies and cognitive processes) in realistic decision scenarios. The purpose of descriptive decision theory is to develop models of decision making which provide valid descriptions of actual decision making behaviour. Normative, Descriptive & Prescriptive Decision Theory Normative Descriptive How would rational How do rational individuals individuals make actually make decision in decision? real life? Prescriptive Based on what we know on rational decision making (normative) and the actual human behaviour (descriptive), how can we help people to improve their decision making?  Prescriptive Decision Theory  It aims at optimisation but considering the human's limitation to process information.  The theory takes into account emotional, motivational, and other non rational effects due to human's vulnerable to emotional and motivational states, and are error-prone  Prescriptive decision analysis bridges the gap between descriptive observations of the way people do make choices and the normative guidelines for how they should make choices  It prescribes techniques for aiding decision making.  Human characteristics : realist, optimist, pessimist and opportunist views of decision Realist Optimist Pessimist Opportunist A person who is A person A person A person who inclined to literal disposed to take expecting the takes advantage truth and a favourable view worst possible of any pragmatism of things. outcome.. opportunity to achieve an end. Choose action Looks at the best Looks at the Create an with the largest that could worst that could opportunistic loss expected value happen under happen under (or regret) table. (highest outcome each action and each action and Then they take after considering then chooses the then choose the the lowest the risk). action with the action with the outcome among largest value largest payoff the maximum (highest (highest outcome outcomes. outcome). among the minimum outcomes).  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.  Decision theory 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 is explanation about how decisions would be made.  Descriptive theory is an explanation what people actually do when making decision.  Prescriptive theory is the prescription of technique in aiding decision making after considering human behaviour. Discussion  Can we say that rationality is subjective – “a behavior that is rational for one person may not be rational for another” ?  If you see a friend making a decision which seems irrational to you, what do you do?  After listening to your friend’s reasoning for his or her decision, how do you feel if the reasoning seems differing with your rational way of thinking?