Decision Making

Theories and Concepts

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).

GAME THEORY
Study on how strategic interactions among economic agents produce outcomes based on the preferences/utilities of those agents (Ross, 2010).

Game Theory
Outcome depends on the decisions of two or more decision players, where no single decision maker has full control over the outcomes (Kelly, 2003).

Game Theory
Agent acts based on rationality, rationality is the maximization of ones payoff, thus the agent always act to gain as much as possible, regardless of how if affects others (Scheve, 2011).

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

Basic Elements
Choice - generally fixed; large choices makes practical analysis more difficult Payoff - commonly measured by money Players - opponents

Classifications
Games of Skill Games of Chance Games of Strategy

.Game theory
Sequential move vs. Simultaneous move Sequential Simultaneous Game trees (backward induction reasoning) Matrices (show outcomes)

Game Theory Prisoners Dilemma

A winning strategy in competitive games should have a random component so that the opponent cant anticipate ones moves (Parlin, n.a).

Salient Criticism..
Not all the factors are accounted for in defining, limiting and isolating the variables that influence strategy and outcome

Public Choice Theory

James Buchanan and Gordon Tullock - Primary developers of the theory on their book Calculus and Consent on 1962 William Riker - Founder of the field

Public Choice Theory

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).

Public Choice Theory

Related to Game Theory, Social Choice Theory, and Positive Political Theory Assumes that people act based on selfinterest and utility-maximization voters vote for candidates that will make them personally better off; bureaucrats strive to advance their own careers

Public Choice Theory

Explains how political decision making results in outcomes that conflict with the preferences of the general public (Parlin, n.a)

Pulblic Choice Theory

Elections Legislatures Bureaucracies Rent-Seeking

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

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).

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)

Causal Decision Theory

Contrasts Evidential Decision theory which concerns on conditional actions which the agent expected to bring the best outcome.

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

Expected Utility
Ex. Studying and Passing EU(S) = P(P if S)U(S & P) + P(~P if S)U(S & ~P)

 EU determines the action of the agent

Causal Decision Theory

Causation of the action entails correlation, but correlation does not entail causation

A good decision aims to produce a good outcome rather than evidence of a good outcome; CAUSAL DECISION THEORY aims for the good and not just signs of the good (Weirich, 2008).

Causal Decision Theory

Prisoners Dilemma (from Game theory)

What shall the prisoners do?

Criticisms
Newcombs Paradox - portrays conflict between causal and evidential decision theory Probabilities of conditionals - situations considered as causal might actually be conditional

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

Expected Utility Hypothesis

EDT is concerned on Expected Utility - states that the agent chooses between risky or uncertain prospects by comparing the expected utility values (Mongin, 1998).

Expected Utility Hypothesis

When agents are forced to make choices under uncertainty, they do so by maximizing the expected utility (Allen ,1987)

Evidential Decision Theory

maximization of the expected utility (V )of an action (A) through the calculation of conditional probabilities (Harper, 1981)

Evidential Decision Theory

Causation is difficult, information can be directly obtained from probabilistic information Correlation fuels EDT

Correlation is easier to figure out that causation

Evidential Decision Theory

Allows reaching to a correct decision without relying on any complex causal apparatus

Major Criticisms....
An irrational policy of managing the news (Lewis, 1981) "Rational agents choose acts on the basis of their causal efficacy, not their auspiciousness; they act to bring about good results even when doing so might betoken bad news. (Joyce, 1999)

Hence Decision Making Theories involves 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 remains unknown factors that the DM has to get through himself.