THE THEORY OF DECISION MAKING

THE THEORY OF DECISION MAKING



THEORY OF DECISION MAKING

Introduction

The Theory of Decision

The decisions that we make in everyday life have primary consequences for us. We go without breakfast because we are behind schedule in leaving the house. However, at times, the primary consequences of making a good or poor decision will fall on others—a family or a school system may have fewer funds to provide breakfast to children. Indeed, the more formal authority we accrue the more likely it is that our decisions will affect many other people. Deciding matters that will have good and bad consequences for other persons presents both the reward and challenge of leadership. The greater the consequence of a decision for others, the more likely we are to want additional guidance, beyond the flip of a coin and familiar sources of advice, to determine our choices in the face of uncertainty. (Butler, 2008)

Decision-making processes lay out the choices involved in a decision, and eventually one must select among them, including the options to do nothing or to start over to come up with a new set of choices. In addition to the reasoned and well-researched choices that analysis may provide us, other levers of influence shape our decision, including our preference for an authoritative figure that we trust to make a recommendation among the choices that we face.

Some behaviors observed in economics, like the disposition effect or the reversing of risk aversion/risk seeking in case of gains or losses (termed the reflection effect), can be explained referring to the prospect theory This period marks the beginning of the cooperation extended by Kahneman with Amos Tversky. Together, Kahneman and Tversky published a series of seminal articles in the general area of Judgement and decision-making, resulting in the publication of their seminal prospect theory in 1979. Dr. Kahneman was awarded the Nobel Prize in Economics in 2002 for his work on the theory of perspective, and is generally regarded as being the fact that Tversky have also received the award had it been alive (he died in 1996). (Tversky , 1981)

The complexity of deciding the “best” choice provides a glimpse into the complexity of major decisions such as climate change, war and peace, and world hunger. These are “wicked problems,” tremendously complex issues that are difficult to define. They involve many stakeholders in their definitions that lead logically to formulations of proposed solutions that have winners and losers and thus various points of Pareto efficiency and improvement. These stakeholders have differing, often-opposing worldviews and different frames of reference through which they understand the problem. These differences shift over time to constrain problem-solving approaches, improve them, or make new demands on them. Exacerbating the complexity of these wicked problems, resources with which to address them shift over time with changing national and international events but never seem adequate. Their complexity and changing nature and context defy one-time or generic solutions

Models of Decision Criteria

Certainty: We know with certainty what the effects of ...