IMS555 Decision Theory

Week 1
Introduction

Learning objectives
Understand the concept of decision theory
Understand issues about the nature of
decisions
Describe the concept of normative
approach of decision theory
Describe the concept of descriptive
approach of decision theory

Decision
A determination or 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.
A selection of a course of action among several
alternative scenarios.

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
plausible or rational explanation of cause
and effect (causal) relationships among a
group of observed phenomenon.

Decision theory
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)

An interdisciplinary subject that has evolved in

20th century contributed by research from
economics, management, mathematics,
psychology, political science, social science and
philosophy.

Normative Decision Theory

A normative decision theory is a theory
about how decisions would be made.
It deals with optimal decisions
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.

Normative Decision Theory

It assumes an ideal decision maker who is
rational with access to perfect information and
not confined by natural human limitations.
Rational people make decision in a consistent
way given the perfect information.
The normative decision theory looks for criteria
of rational deciding and wants to give
assistance on how one is to decide in a given
situation reasonably.

Rational
Rational - Consistent with reason or based on reason
(logical)
In philosophy, rationality is the characteristic of any
action, belief, or desire, that makes the choice optimal
under a set of constraints.
A rational decision is one that is not just reasoned,
but is also optimal for achieving a goal or solving a
problem.
It refers to the conformity of one's beliefs with one's
reasons to believe, or with one's actions with one's
reasons for action.
But, rationality is also subjective.
A mode of behavior that is rational for one person may not be
rational for another

Descriptive Decision Theory

A descriptive theory is a theory about how
decisions are actually made and what
people are observe to do.
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.

Prescriptive Decision Theory

It aims at optimisation but considering the
human's limitation to process information.
The theory take into account emotional,
motivational, and other non rational effects
due to human's vulnerable to emotional
and motivational states, and are errorprone

Interrelations of normative,
descriptive and prescriptive theories
Descriptive and normative theories are
deeply interrelated
eg
people always strive to obtain optimize decision
but if they are not successful, their behaviours
are shaped to find other ways to find solution.

Prescriptive differs from normative in a

way that normative is designed for
idealized human being.

Activities
Student should further explore;
The concept of decision theory
The realist, optimist, pessimist and opportunist views of
decision
More conceptual definition of decision from the vast
literature of DM
The concept of structured problem
The concept of unstructured/Ill-Structured Problem
The Concept of Normative Theory
The normative aspect of decision theory
The Concept of Descriptive Theory
The descriptive aspect of decision theory

Questions
Define the following terms:
Decision Theory
Decision
Theoretical Question
Normative Theory
Descriptive Theory

Questions
Discuss the importance of decision theory.
How decision relate to our everydays life?
Discuss the normative approach of
decision theory with examples.
Discuss the descriptive approach with
examples.
Discuss the prescriptive approach with
examples.