Decisions
A decision must have at least two characteristics – Goal (or objectives) Choices (or more specifically a set of
choices
Decisions
Goal What is the purpose of the decision? What is the decision intended to
accomplish? Maximize profits Reduce manufacturing costs Have more fun
Usually goals are more specific Increase snipe trap production rate
Decisions
Choices A decision requires a selection of one or
more alternatives from a set of choices A decision that has only one alternative
is not a decision Imagine a Chinese restaurant with only Kung
Pao Chicken on the menu Choices can be discrete, or… …continuous, even (theoretically) infinite
Decisions – but wait – there’s more
Actions Each choice must have an associated
action Something must be done or something
must happen Even if one of the actions is do nothing –
that’s still an action (but you can only have one of these)
Order snipe trap weaving machine from Snipes-R-Us
Decisions – but wait – there’s more
Metrics You should have a way to measure
the outcome of a decision What you measure or your metrics
should be defined in terms of your goals or objectives
You can have multiple metrics, but.. … they should be unambiguous … you should be able to tell
Decisions – but wait, there’s more
Feedback Effective decision making requires a
feedback mechanism You should be able to assess the
impact of a decision
Some decisions are one time…And some are recurrent
Decision Making
So, suppose some time in the future you buy a house,…… and further in the future your spouse wants a new house, so……you try to sell your current (future) house…
Decision Making
Goal: maximize the amount of money you get for the old houseSuppose you two offers: Offer A: $150,000 Offer B: $140,000
Do we have what we need to make this decision?Which do you choose?
Decision Making
OK, but suppose the Offerer B agrees to take your spouse’s brother … (who came for a “weekend” visit but
has been living in your basement for five years, eats all of your food, never flushes the toilet, and makes strange noises in the basement that you are afraid to investigate)
… with the house
Decision MakingOK, let’s change to two goals in selling the house… Maximize the selling price for the house Minimize the amount of time from when it
goes on the market to the sell of the house Again you have two offers…
Offer A: $180,000 but it must wait on the buyer to close on another property (might take six months)
Offer B: $150,000 but the offerer has “cash-in-hand” and would be ready to close next week
Which do you choose?
Decision Making
Which do you choose?
Revenue
Tim
e o
n M
ark
et
High Low
Short A$200k1 week
B$150k1 week
Long C$200k
36 weeks
D$150k
36 weeks
Decision Making
Decision making is usually not about choosing between good and badThat would be too easy…but about competing goods or competing badsDecisions can be complicated by multiple goals
Decision Making
Let’s try to sell that house one more time-This time consider this scenario Offer A: will pay $200,000 but the offer is
contingent on the buy selling another piece of property
Offer B: will pay $150,000 but has “cash-in-hand” (no contingencies)
Decision Making
So, what did we introduce to this decision making process?Uncertainty!So, how do we deal with uncertainty?
Decision MakingRemember the brother-in-law in the basement?Did you change your decision?If you did, something else is at playHaving someone take your brother-in-law has some value to you…And that value will bear on your decision…even if you can’t quantify that value (although, indirect you often can)Subjective Utility
Decision MakingDecision making for important real world problems is rarely neat and tidy, or simpleWe assume that we have perfect knowledge, but it is rarely trueWe often have multiple goals and objectives Sometime conflicting goals and objectives
We often need to deal with uncertainty in our decisionsDecisions are often made contrary to what the data, algorithms or experts suggest
Decision MakingSubjective Utility Theory Decision makers make decisions to
optimize the subjective utility of that decision’s outcome
Subjective utility means the value of that outcome to the decision maker
This may not be congruous with more objective outcome measures like cost or income
This is why company president Smith picks the more expensive design A for the new headquarters building rather than the cheaper design B
Decision MakingSubjective Utility Theory To the extent that we can operationalize
the subjective utility of outcomes, … … the better are able to support the
decision making process