IMS555: Decision Theory

Sem 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 Phases
Decision Models
Steps of Decision Making process

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.
8

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.
9

Overview of Decision Theory

One must keep in mind that most
decisions are made unconsciously.
Jim Nightingale, Author of Think SmartAct 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.
10

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.

11

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.

12

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

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 years
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.

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

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

Decision Model
Three Models:
Condorcet / Traditional
Modern sequential models
Non-sequential models

22

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 orientation
Has 5 stages:
i. Felt difficulty
ii. Definition of the character of the
difficulty
iii. Possible solutions suggestion
iv. Evaluation of the suggestion
v. Further observation & experiment to
accept or reject the suggestion

2. Modern Sequential Models

2. Herbert & Simon model. Modified
Deweys 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 decision
b) Finding possible courses of action
c) Choosing among courses of action

ii. Design
iii. Choice

2. Modern Sequential Models

3. Brim et al model.
6 steps:
i.
ii.
iii.
iv.
v.
vi.

Identification of the problem

Obtaining necessary information
Production of possible solutions
Evaluation of such solutions
Selection of a strategy for performance
Implementation of the decision

3. Non-sequential Models
1. Mintzberg Model. Used the same three major phases
as Herbert & Simon model:
i.

Identification phase
a) Decision recognition problems & opportunities are identified
b) Diagnosis - the tapping of existing information channels and the
opening of new ones to clarify and define the issues

ii. Development phase

a) Search finding ready-made solutions
b) Design develop new solutions or modify ready-made solutions.

iii. Selection phase

a) Screen evaluate intensively ready-made alternatives & eliminate
obviously suboptimal alternative
b) Evaluation-choice choice between the alternatives
c) Authorization approval for the solution selected from the higher
up in the hierarchy

3. Non-sequential Models
1.

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.
2.
3.
4.
5.
6.
7.
8.

Define the problem

Determine requirements
Establish goals
Identify alternatives
Define criteria
Select a decision making tool
Evaluate alternatives against criteria
Validate solutions against problem
statement

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.