decision making theories & concepts
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Decision MakingTheories and
Concepts
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Decision Theories
Interdisciplinary area of study that
concerns analyses of decisions and their
consequences of mathematicians,statisticians, economists, philosophers,
managers, politicians, psychologists and
anyone else (Annisimov, 2011).
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GAME THEORY
Study on how strategic interactions among
economic agents produce outcomesbased on the preferences/utilities of those
agents (Ross, 2010).
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Game Theory
Outcome depends on the decisions of two
or more decision players, where no singledecision maker has full control over the
outcomes (Kelly, 2003).
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Game Theory
Agent acts based on rationality, rationality
is the maximization of ones payoff, thus
the agent always act to gain as much aspossible, regardless of how if affects
others (Scheve, 2011).
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Basic Elements
Utility subjective welfare that an agent
obtains from an object or an event
Agents act in order to maximize utility(Samuelson, 1938)
Game situations which involve an agent
in maximizing his utility by anticipating the
responses to his actions by one or more
other agents
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Basic Elements
Choice
- generally fixed; large choices makes
practical analysis more difficult Payoff
- commonly measured by money
Players- opponents
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Classifications
Games of Skill
Games of Chance
Games of Strategy
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.Game theory
Sequential move vs. Simultaneous move
Sequential Game trees (backwardinduction reasoning)
Simultaneous Matrices (show
outcomes)
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Game Theory
Prisoners Dilemma
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A winning strategy in competitive
games should have a random
component so that the opponentcant anticipate ones moves
(Parlin, n.a).
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Salient Criticism..
Not all the factors are accounted for in
defining, limiting and isolating the
variables that influence strategy and
outcome
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Public Choice Theory
James Buchanan and Gordon Tullock
- Primary developers of the theory on their
book Calculus andConsenton 1962
William Riker
- Founder of the field
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Public Choice Theory
Study of politics based on economic
principles (Felkins, 1997)
Transfers the rational actor model of
economic theory to the realm of politics
(Shughart II, 2008).
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Public Choice Theory
Related to Game Theory, SocialChoice
Theory, andPositive Political Theory
Assumes that people act based on self-interest and utility-maximization
voters vote for candidates that will make
them personally better off; bureaucrats
strive to advance their own careers
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Public Choice Theory
Explains how political decision making
results in outcomes that conflict with thepreferences of the general public (Parlin,
n.a)
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Pulblic Choice Theory
Elections
Legislatures
Bureaucracies
Rent-Seeking
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Lessons
Changing the identities of public figures
will not produce major changes in policy
outcomes
Electing better people will not lead much
to a better government
Men are not angelsthey pursue their on
objectives
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In framing a government which is to be
administered by men over men, the great
difficulty lies in this: you must first enable
the government to control the governed;
and in the next place oblige it to control
itself (Federalist, no. 51 as cited in
Shughart II, 2008).
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Causal Decision Theory
A rational agent should choose that action
which among all the alternatives has the
maximum expected value (Armendt,
1986).
Recommends an option that maximizes
utility, whose utility equals or exceeds the
utility of all the other options (Weirich,2008)
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Causal Decision Theory
Contrasts Evidential Decision theory which
concerns on conditional actions which theagent expected to bring the best outcome.
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Expected Utility
The probability-weighted average of its
possible outcomes' utilities
Possible states of the world that are
mutually exclusive and jointly exhaustive,
and so form a partition, generate an act's
possible outcomes
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Expected Utility
Ex. Studying and Passing
EU(S) = P(P ifS)U(S& P)+ P(~P ifS)U(S& ~P)
EU determines the action of the agent
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Causal Decision Theory
Causation of the action entailscorrelation, but correlation does
not entail causation
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A good decision aims to produce a good
outcome rather than evidence of a goodoutcome; CAUSAL DECISION THEORY
aims for the good and not just signs of the
good (Weirich, 2008).
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Causal Decision Theory
Prisoners Dilemma (from Game theory)
What shall the
prisoners do?
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Criticisms
Newcombs Paradox
- portrays conflict between causal and
evidential decision theory
Probabilities of conditionals
- situations considered as causal mightactually be conditional
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Evidential Decision Theory
Choosing the action with the highest
expected utility (Grafstein, 1991)
Contrasts Causal Decision theory
- requires causal connection between
actions and desirable outcomes
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Expected Utility Hypothesis
EDT is concerned on Expected Utility
- states that the agent chooses between
risky or uncertain prospects by comparingthe expected utility values (Mongin,
1998).
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Expected Utility Hypothesis
When agents are forced to make choices
under uncertainty, they do so bymaximizing the expected utility (Allen
,1987)
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Evidential Decision Theory
maximization of the expected utility (V )of
an action (A) through the calculation of
conditional probabilities (Harper, 1981)
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Evidential Decision Theory
Causation is difficult, information can be
directly obtained from probabilistic
information
Correlation fuels EDT
Correlation is easier to figure out that
causation
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Evidential Decision Theory
Allows reaching to a correct decision
without relying on any complex causalapparatus
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Major Criticisms....
An irrational policy of managing the news
(Lewis, 1981)
"Rational agents choose acts on the basis
of theircausal efficacy, not their
auspiciousness; they act to bring
aboutgood results even when doing so
might betoken bad news. (Joyce, 1999)
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HenceDecision Making Theoriesinvolves a wide variety of methods in
analyzing, explaining, and even guiding
the future actions of the decision maker.
However, despite the encompassing
nature of the DMT, there still remainsunknown factors that the DM has to get
through himself.
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