Professor’s Supplemental Lecture

Uncertainty and Decision Making

I. Root Cause analysis (RCA) is the process of discovering the root causes of problems in
order to identify appropriate solutions. RCA assumes that it is much more effective to
systematically prevent and solve for underlying issues rather than just treating ad hoc
symptoms and putting out fires.

Root cause analysis can be performed with a collection of principles, techniques, and
methodologies that can all be leveraged to identify the root causes of an event or trend.
Looking beyond superficial cause and effect, RCA can show where processes or systems
failed or caused an issue in the first place.

Goals and benefits

 The first goal of root cause analysis is to discover the root cause of a problem or
event.
 The second goal is to fully understand how to fix, compensate, or learn from any
underlying issues within the root cause.
 The third goal is to apply what we learn from this analysis to systematically
prevent future issues or to repeat successes.

Cause and Effect Fishbone diagram

Another common technique is creating a Fishbone diagram, also called an Ishikawa

diagram, to visually map cause and effect. This can help identify possible causes for a
problem by encouraging us to follow categorical branched paths to potential causes until
we end up at the right one.

Typically we start with the problem in the middle of the diagram (the spine of the fish
skeleton), then brainstorm several categories of causes, which are then placed in off-
shooting branches from the main line (the rib bones of the fish skeleton). Categories are
very broad and might include things like “People” or “Environment.” After grouping the
categories, we break those down into the smaller parts. For example, under “People” we
might consider potential root cause factors like “leadership,” “staffing,” or “training.”

As we dig deeper into potential causes and sub-causes, questioning each branch, we get
closer to the sources of the issue. We can use this method eliminate unrelated categories
and identify correlated factors and likely root causes. For the sake of simplicity, carefully
consider the categories before creating a diagram.
Common categories to consider in a Fishbone diagram:

Machine (equipment, technology)

Method (process)

Material (includes raw material, consumables, and information)

Man/mind power (physical or knowledge work) M’s

Measurement (inspection)

Mission (purpose, expectation)

Management / money power (leadership)

Maintenance

Product (or service)

Price

Promotion (marketing)

Process (systems) P’s

People (personnel)

Physical evidence

Performance

Surroundings (place, environment) S’s

Suppliers

Skills

*These categories may also be combined.

Tips for performing effective root cause analysis

Ask questions to clarify information and bring us closer to answers. The more we can
drill down and interrogate every potential cause, the more likely we are to find a root
cause. Once we believe we have identified the root cause of the problem (and not just
another symptom), we can ask even more questions: Why are we certain this is the root
cause instead of that? How can we fix this root cause to prevent the issue from happening
again?
Use simple questions like “why?” “how?” and “so what does that mean here?” to carve a
path towards understanding.

Consider this example:

The problem is reports are not printed within the time-frame.

The root causes are Materials, Manpower, Machinery, and Methods with specific causes.
TOOLS FOR UNCERTAINTY AND DECISION MAKING

1. Laplace-Bayes Criterion
Pay off Table
Economy
Alternatives Growing Stable Declining
Bonds 40 45 5 30 40+45+5=90/3
Stocks 70 30 -13 29 70+30-13=87/3
Mutual Funds 53 45 -5 31 53+45-5=93/3

Decision: Invest in Mutual

Funds  

2. Wald Maximin Criterion

*Maximizes the minimum pay off (Best of Worst)

Pay off Table

Economy
Alternatives Growing Stable Declining Worst
Bonds 40 45 5 5
Stocks 70 30 -13 -13
Mutual Funds 53 45 -5 -5

Decision: Invest in Bonds.  

3. Maximax Criterion

*Maximizes the maximum pay off (Best of Best)

Pay off Table

Economy
Alternatives Growing Stable Declining Best
Bonds 40 45 5 45
Stocks 70 30 -13 70
Mutual Funds 53 45 -5 53

Decision: Invest in Stocks.      

4. Savage Minimax Criterion

*Minimizes the maximum regret

Pay off Table

Economy
Declinin
Alternatives Growing Stable g Growing Stable Declining
Bonds 40 45 5 70-40=30 45-45=0 5-5=0
Stocks 70 30 -13 70-70=0 45-30=15 5-(-13)=18
Mutual Funds 53 45 -5 70-53=17 45-45=0 5-(-5)=10

*Regret = Opportunity Loss

*Regret = Best Payoff=Pay Off Received

Regret Table
Economy
Alternatives Growing Stable Declining Maximum
Bonds 30 0 0 30
Stocks 0 15 18 18
Mutual Funds 17 0 10 17

Decision: Invest in Mutual Funds.  

5. Zero Sum and Non-Zero Sum Games

ZERO SUM GAMES

Illustrative Problem 1

Suppose two people are playing a simple game with nickels and quarters. At the same time, they
each put out either a nickel or a quarter. If at least one player plays a nickel, player 1 gets both
coins. Otherwise, player 2 gets both. Naturally, both players wish to gain as much money as
possible. How should they play in order to do this?

Solution: Eliminating Dominant Strategies

We can assign payoff matrices to such games that define the payoffs that players will get based
on the strategies they use. In this example, each player has only two strategies--put out a nickel
or put out a quarter. Here is a payoff matrix for player 1:

Player 2
Nickel Quarter
Player 1 Nickel 5 25
Quarter 5 -25

The rows represent player 1's possible strategies, and the columns represent player 2's possible
strategies. If player 1 and player 2 both play nickels (the top left entry), player 1 wins player 2's
nickel so gains 5 cents. On the other hand, if both play quarters (the bottom right entry), player 2
wins player 1's quarter, so player 1 loses 25 cents.

Notice that every entry in the first row is greater than all of the entries in that column. In other
words, playing a nickel is always at least as good as playing a quarter for player 1. So, playing a
nickel is called a dominant strategy, and it dominates the strategy of playing a quarter. It is never
advantageous to play a dominated strategy, so we can reduce our payoff matrix to reflect this:

Player 2
Nickel Quarter
Player 1 Nickel 5 25

Now, the nickel strategy for player 2 also dominates. So, playing nickels is the best strategy for
both players. Notice that, if either plays quarters, he will not gain more money than if he had just
played nickels.
Illustrative Problem 2:

Suppose two people are playing a similar game with nickels and quarters. Now, if player 1 plays
a nickel, player 2 gives him 5 cents. If player 2 plays a nickel and player 1 plays a quarter, player
1 gets 25 cents. If both players play quarters, player 2 gets 25 cents.

Solution: Saddle Points

This game differs from game 1 in that it has no dominant strategies. The rules are as follows: If
player 1 plays a nickel, player 2 gives him 5 cents. If player 2 plays a nickel and player 1 plays a
quarter, player 1 gets 25 cents. If both players play quarters, player 2 gets 25 cents. We get a
payoff matrix for this game:

Player 2
Nickel Quarter
Player 1 Nickel 5 5
Quarter 25 -25

Notice that there are no longer any dominant strategies. To solve this game, we need a more
sophisticated approach. First, we can define lower and upper values of a game. These specify the
least and most (on average) that a player can expect to win in the game if both player play
rationally. To find the lower value of the game, first look at the minimum of the entries in each
row. In our example, the first row has minimum value 5 and the second has minimum -25. The
lower value of the game is the maximum of these numbers, or 5. In other words, player 1 expects
to win at least an average of 5 cents per game. To find the upper value of the game, do the
opposite. Look at the maximum of every column. In this case, these values are 25 and 5. The
upper value of the game is the minimum of these numbers, or 5. So, on average, player 1 should
win at most 5 cents per game.

Nickel Quarter Min

Nickel 5 5 5
Quarter 25 -25 -25
Max 25 5

Notice that, in our example, the upper and lower values of the game are the same. This is not
always true; however, when it is, we just call this number the pure value of the game. The row
with value 5 and the column with value 5 intersect in the top right entry of the payoff matrix.
This entry is called the saddle point or minimax of the game and is both the smallest in its row
and the largest in its column. The row and column that the saddle point belongs to are the best
strategies for the players. So, in this example, player 1 should always play a nickel while player 2
should always play a quarter.
Illustrative Problem 3:

We still have two people playing a game with nickels and quarters. Now, if both players play the
same coin, player 2 gives player 1 the average value of the coins; otherwise, player 1 gives
player 2 the average value of the coins.

Solution: Mixed Strategies

The rules of game 3 were as follows: two players have nickels and quarters. At the same time,
they each play one coin. If both players play the same coin, player 2 gives player 1 the average
value of the coins; otherwise, player 1 gives player 2 the average value of the coins. Here is the
payoff matrix for this game:

Player 2
Nickel Quarter
Player 1 Nickel 5 -15
Quarter -15 25

The lower value of this game is -15 while the upper value is 5. Can we find a pure value for the
game? According to the Minimax Theorem, one of the most important results in game theory, we
can. The Minimax Theorem states that every finite, two-person, zero-sum game has a value V
that is the average amount that one player can expect to win if both players act sensibly.

Suppose player 2 knows which coin player 1 will play on each turn. Then it will be easy for
player 2 to play a coin that makes player 2 lose money. Therefore, player 1 can't play with a
pattern. Instead, he must use a mixed strategy, in which he randomly chooses to play a nickel or
quarter on each turn. However, it is not necessarily true that he should play each strategy half the
time. He may want to weight the strategies differently, playing one with probability p and the
other with probability 1 - p. How do we figure out p?

It turns out that one property of the value of a game is that, if player 1 plays his optimal strategy,
he will achieve exactly the value of the game no matter what the other player does (as long as the
other player has no dominant strategies). In particular, the yield when player 1 plays against
player 2's two different pure strategies should be the same. In other words, if player 1 uses his
optimal strategy, he will get the same amount of money whether player 2 always plays nickels or
always plays quarters. Let's suppose that player 2 always plays nickels. Player 1 plays nickels p
of the time so gains 5 cents p of the time. The other 1 - p of the time, he loses 15 cents. Overall,
he wins 5p - 15(1 - p) = 20p - 15. Now, suppose player 2 always plays quarters. Player 1 plays
nickels p of the time so loses 15 cents p of the time. The rest of the time, he wins 25 cents.
Overall, he wins -15p + 25(1 - p) = 25 - 40p. Because he should win the same in both situations,
the two winnings are the same. So, 20p - 15 = 25 - 40p. Solving for p, we find that it is 2/3. To
find the amount that player 1 expects to win, we just plug this back into either of the equations
and find that he should win an average of -5/3 per game. Even if player 2 figures out this
strategy, he cannot do anything to change it.

Similarly, we can look at the payoff matrix from player 2's point of view and find a mixed
strategy for player 2. If we do so, we find that player 2 should play nickels 2/3 of the time and
quarters 1/3 of the time. If he does so, he should win an average of 5/3 cents per game.

NON-ZERO SUM GAMES

Illustrative Problem: The Prisoner’s Dilemma

Two criminals are captured by the police. The police suspect that they are responsible for a
murder, but do not have enough evidence to prove it in court, though they are able to convict
them of a lesser charge (carrying a concealed weapon, for example). The prisoners are put in
separate cells with no way to communicate with one another and each is offered to confess.

If neither prisoner confesses, both will be convicted of the lesser offense and sentenced to a year
in prison. If both confess to murder, both will be sentenced to 5 years. If, however, one prisoner
confesses while the other does not, then the prisoner who confessed will be granted immunity
while the prisoner who did not confess will go to jail for 20 years.

What should each prisoner do?

Solution:

To help us determine the answer, let's come up with a payoff matrix for each prisoner. The value
in each cell is the time spent in prison, so the prisoners will try to end up in the matrix cell with
the lowest number. The first number of each pair refers to the prison time of prisoner 1, and the
second number to prisoner 2.

Prisoner 2
Confess Not Confess
Prisoner 2 Confess 5, 5 0, 20
Not Confess 20, 0 1, 1
Let's assume the role of prisoner 1. We're looking to minimize our prison time. Since we have no
way of knowing whether our partner in crime has confessed, let's first assume that he has not. If
Prisoner 1 doesn't confess either, both will go to prison for 1 year. Not bad. But, if Prisoner 1
confesses, he will go free, while his partner rots away in jail. We'll assume that there is no "honor
among thieves" and each prisoner only cares about minimizing his jail time. From the above
discussion, it is obvious that if Prisoner 2 does not confess, Prisoner 1 is definitely better off
confessing.

Now let's look at the other possibility. Say prisoner 2 confesses. If Prisoner 1 does not confess,
he will go to jail for 20 years. But if he does confess, he will get only 5 years in prison. It is
clearly better to confess in this case as well.

So is that it? Is the problem solved? Is each prisoner better off confessing? Well, it may seem so
from the above discussion, but if we look at the payoff matrix, it is clear that the best payoff for
both prisoners is when neither confesses! But game theory advocates that both confess.

This "game" can be generalized to any situation when two players are in a non-cooperative
situation where the best all-around situation is for both to cooperate, but the worst individual
outcome is to be cooperating player while the other player defects.

On the one hand, it is tempting to defect, or confess. Since you have no way of influencing the
other player's decision, no matter what he does, you're better off confessing. But on the other
hand, you're both in the same boat. Both of you should be sensible enough to realize that
cheating undermines the common good.

There is no single "right" solution to the Prisoner's Dilemma (that's why it's a dilemma). Its
implications carry into psychology, economics, and many other fields.