IMS555: Decision TheorySem Sept 2012 – Jan 2013

Course Description

This course is intended to cover two distinct disciplines of decision theory (DT) and expert systems (ES). In the first part, some non-technical overviews on decision theory are discussed. In the remaining part, expert system concepts, issues and technologies are conversed. By combining these two disciplines, students would be able to apply concept of expert systems as mechanism for decision support.

Course Outcome

• At the end of the course, students should be able to:i. Describe the concepts of decision theory and

decision processes.ii. Identify and explain principles and models of

artificial intelligence for decision support purposes.

iii. Distinguish and discuss AI technologies for organizational decision support purposes.

Course Content

• First 8 weeks: Discuss on decision theory Another 6 weeks: Discuss on expert system

Assessment

• Attendance/ Exercises: 10%

• Assignment 1 (Decision Theory) : 15%• Assignment 2 (Group) (Expert System): 15%• Midterm Test: 20%• Final Test: 40%

Reference/Text Books

• Peterson, M. (2019). An Introduction to Decision Theory, Cambridge University Press. Cambridge.

• Resnik, M. D. (1987). Choices: An Introduction to Decision Theory. University of Minnesota Press. Minneapolis, London.

• Jackson, P. (1999). Introduction to Expert Systema. 3rd Ed. Addison-Wesley.

IMS555: Decision Theory

Week 1:Overview of Decision Theory

Decision Theory PhasesDecision Models

Steps of Decision Making process

8

Overview of Decision Theory

• From a psychological perspective, it is necessary to examine individual decisions in the context of a set of needs, preferences an individual has and values they seek.

• From a cognitive perspective, the decision making process must be regarded as a continuous process integrated in the interaction with the environment.

9

Overview of Decision Theory

• From a normative perspective, the analysis of individual decisions is concerned with the logic of decision making and rationality and the invariant choice it leads to.

• Yet, at another level, it might be regarded as a problem solving activity which is terminated when a satisfactory solution is reached.

• Therefore, decision making is a reasoning or emotional process which can be rational or irrational, can be based on explicit assumptions or tacit assumptions.

10

Overview of Decision Theory

• One must keep in mind that most decisions are made unconsciously.

• Jim Nightingale, Author of Think Smart-Act Smart, states that "we simply decide without thinking much about the decision process.“

• In a controlled environment, such as a classroom, instructors encourage students to weigh pros and cons before making a decision.

11

Overview of Decision Theory

• However in the real world, most of our decisions are made unconsciously in our mind because frankly, it would take too much time to sit down and list the pros and cons of each decision we must make on a daily basis.

12

Overview of Decision Theory

• A major part of decision making involves the analysis of a finite set of alternatives described in terms of some evaluative criteria. These criteria may be benefit or cost in nature.

• Logical decision making is an important part of all science-based professions, where specialists apply their knowledge in a given area to making informed decisions.

• For example, medical decision making often involves making a diagnosis and selecting an appropriate treatment.

• Some research using naturalistic methods shows, however, that in situations with higher time pressure, higher stakes, or increased ambiguities, experts use intuitive decision making rather than structured approaches,

• Following a recognition primed decision approach to fit a set of indicators into the expert's experience and immediately arrive at a satisfactory course of action without weighing alternatives.

What is decision theory?

• Decision theory is theory about decisions.• Decision theory is the theory of rational

decision making.• Decision theory is the product of the effort of

economists, mathematicians, philosophers, social scientist, and statisticians toward making sense of how individuals and groups make or should make decisions

Decision theory divided in two

• Normative (Prescriptive) decision theory: seek to yield prescriptions about what decisions makers are rationally required to do.– Example: it seems worthwhile to explain why people

gamble even though they know they will almost certainly lose money in the long run. No matter this behaviour is rational or not

• Descriptive decision theory: seek to explain and predict how people actually make decision.– This is an empirical discipline, stemming from experimental

psychology.

Normative & Descriptive Theories• These two theories are difficult to distinguish.• A decision theory is falsified as a descriptive theory if a decision

problem can be found in which most human subject perform in contradiction to the theory.

• A decision theory is weakly falsified as a normative theory if a decision problem can be found in which an agent can perform in contradiction with the theory without being irrational .

• A decision theory is strictly falsified as a normative theory if a decision problem can be found in which an agent who performs in accordance with the theory cannot be a rational agent

Individual or Group Decision• When corporations, clubs, nations, states, & universities make

decisions as individuals when they attempt to realise some organizational goal, such as enhancing their reputation or bettering last year’s sales figures.

• When several individuals who belong to same club, corporation or university adjudicate differences about group goals or priorities, they are involved in making a group decision.

• Most of the work in group decision theory has concerned the development of common policies for governing group members and with just distribution of resources throughout a group.

• Individual decision theory has concentrated on the problem of how individuals may best further their personal interests.

Discussion

i. Classify the following as individual or group decisions.

a. Two people decide to marry each other.b. The members of a club decide that the annual

dues will be RM5.c. The members of a club decide to pay their dues.d. Two gas stations decide to start a price war.e. The citizens of the Malaysian decide to amend

the Constitution.

Decision Theory Phases

• Three phases:– Old period– Pioneering period– Axiomatic period

Old Period

• Began in ancient Greece• The Greeks did not develop a theory of

rational decision making• The Greeks were not familiar with the concept

of probability• No formulated any precise decision rules• They practise about what to do and not to do

Pioneering Period

• Began in 1654• Used mathematical solution to the problem• This led to the creation of modern probability

theory• Port-Royal Logic were introduced: formulation

of the principle of maximising expected value– Decision theory rule that the alternative with

largest expected value (EV) should be chosen

Axiomatic Period

• Lead to modern decision theory– Truth and probability concept (Frank Ramsey, 1926)

• Proposed a set of eight axioms for how rational decision makers have to choose among uncertain prospects

– Theory of Games and Economic Behaviour (Von Neumann & Morgenstern, 1947)• Individual decision making under risk

– Axiomatic analysis of the principle of maximising expected utility

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Decision Model

• Three Models:– Condorcet / Traditional– Modern sequential models– Non-sequential models

1. Condorcet Model(Condorcet, 1793)

• He divided the decision process into 3 stages:– Principles

• Discusses the principle that will serve as basic for decision in general issue.

• Examine the various aspects of this issue & the consequences of different ways to make the decision.

• The opinions are personal, no attempts are made to form a majority.– Clarification

• Clarify the question & issue.• Combine with others to a small number of more general opinions.• Decision is reduced to a choice between a manageable set alternatives.

– Actual choice• Actual choice between these alternatives

2. Modern Sequential Models

• Three models have been introduced:– Problem-solving orientation– Herbert & Simon model– Brim et al model

2. Modern Sequential Models

1. Problem-solving orientationHas 5 stages:i. Felt difficultyii. Definition of the character of the difficultyiii. Possible solutions suggestioniv. Evaluation of the suggestionv. Further observation & experiment to accept or

reject the suggestion

2. Modern Sequential Models

2. Herbert & Simon model. Modified Dewey’s list to make it suitable for the context of decision in organization:i. Intelligence: Consist of three principal phases:

a) Finding occasions for making a decisionb) Finding possible courses of actionc) Choosing among courses of action

ii. Designiii. Choice

2. Modern Sequential Models

3. Brim et al model.6 steps:i. Identification of the problemii. Obtaining necessary informationiii. Production of possible solutionsiv. Evaluation of such solutionsv. Selection of a strategy for performancevi. Implementation of the decision

3. Non-sequential Models1. Mintzberg Model. Used the same three major phases as Herbert &

Simon model:i. Identification phase

a) Decision recognition – problems & opportunities are identifiedb) Diagnosis - the tapping of existing information channels and the opening of new

ones to clarify and define the issues

ii. Development phasea) Search – finding ready-made solutionsb) Design – develop new solutions or modify ready-made solutions.

iii. Selection phasea) Screen – evaluate intensively ready-made alternatives & eliminate obviously

suboptimal alternativeb) Evaluation-choice – choice between the alternativesc) Authorization – approval for the solution selected from the higher up in the

hierarchy

3. Non-sequential Models1. Diagram 1: Mintzberg Model : The relationships between the phases and

routines of a decision process– decision process

Explanation of Diagram 1• The relation between these phases and routines is circular

rather than linear. – The decision maker "may cycle within identification to recognize

the issue during design, – he may cycle through a maze of nested design and search

activities to develop a solution during evaluation, – he may cycle between development and investigation to

understand the problem he is solving,– he may cycle between selection and development to reconcile

goals with alternatives, ends with means". – Typically, if no solution is found to be acceptable, he will cycle

back to the development phase.

Diagram 2: Models Comparison

Class exercises• Consider the following two examples of decision

processes:– The family needs a new kitchen table, and decides which to

buy.– The country needs a new national pension system, and

decides which to introduce.• Show how various parts of these decisions suit into

phases and routines proposed by Mintzberg et al, can you in these cases find examples of non-sequential decision behaviors that the models mentioned.

Steps of Decision Making process presented by Baker et al.(2001)

1. Define the problem2. Determine requirements3. Establish goals4. Identify alternatives5. Define criteria6. Select a decision making tool7. Evaluate alternatives against criteria8. Validate solutions against problem statement

Define the problem

Determine requirements

Establish goals

Identify alternatives

Define criteria

Select a decision making tool

Evaluate alternatives

Validate solutions

Steps of Decision Making process (Baker et al, 2001)

1. Define the problem– The process must, as a minimum, Identify root

causes, limiting assumptions, system & organizational boundaries and interfaces, and any stakeholder issues.

– The goal is to express the issue in a clear.– One-sentence problem statement that describes both

the initial conditions and the desired conditions.– The problem statement must be concise &

unambiguous written material agreed by all decision makers & stakeholders.

Steps of Decision Making process (Baker et al, 2001)

2. Determine requirements– Conditions that any acceptable solution to the

problem must meet.– Spell out what the solution to the problem must

do.– The requirement must be stated in exact

quantitative form.

Steps of Decision Making process (Baker et al, 2001)

3. Establish goals– Broad statements of intent & desirable

programmatic value– Goals go beyond the minimum essential must

have to wants & desires.– In mathematical form, the goals are objectives

contrary to the requirement that are constraints.

Steps of Decision Making process (Baker et al, 2001)

4. Identify alternatives– Offer different approaches for changing the initial

condition into the desired condition.– Any alternative must meet the requirements.– The feasible one must be deleted from the further

consideration.– Obtain the explicit list of the alternatives.

Steps of Decision Making process (Baker et al, 2001)

5. Define criteria– Decision criteria must be based on the goals.– It is necessary to define discriminating criteria as

objective measures of the goals to measure how well each alternative achieves the goals.

– It can be helpful to group together criteria into a series of sets that relate to separate and distinguishable components of the overall objective for the decision.

Steps of Decision Making process (Baker et al, 2001)

• Criteria should be:– Able to discriminate the alternative and to support

the comparison of the performance of the alternatives

– Complete to include all goals– Operational & meaningful– Non-redundant– Few in number

Steps of Decision Making process (Baker et al, 2001)

6. Select a decision making tool– The selection of an appropriate tool is not an easy

task & depends on the concrete decision problem. & the objectives of the decision makers.

– Sometimes, the simpler the method, the better, but complex decision problems may require complex methods.

Steps of Decision Making process (Baker et al, 2001)

7. Evaluate alternative against criteria– The assessment may be objective (factual), with

respect to some commonly shared & understood scale of measurement or can be subjective (judgmental), reflecting the subjective assessment of the evaluator.

– After evaluations, rank the alternatives or to choose a subset of the most promising alternatives.

Steps of Decision Making process (Baker et al, 2001)

8. Validate solution against problem statement– Have to validate against the requirement and

goals of the decision problem.– It may happen that the decision making tool was

misapplied.– In complex problems the selected alternative may

also call the attention of the decision makers & stakeholders that further goals or requirement should be added to the decision model.