Decision Theory

A Brief Introduction
1994-08-19
Minor revisions 2005-08-23
Sven Ove Hansson
Department of Philosophy an the History of !e"hnolo#y
$oyal %nstit&te of !e"hnolo#y '(!H)
Sto"*holm
1
Contents
Prefa"e ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++4
1+ ,hat is e"ision theory- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++5
1+1 !heoreti"al .&estions a/o&t e"isions +++++++++++++++++++++++++++++++++++++++++5
1+2 0 tr&ly interis"iplinary s&/1e"t+++++++++++++++++++++++++++++++++++++++++++++++++++2
1+3 3ormative an es"riptive theories++++++++++++++++++++++++++++++++++++++++++++++2
1+4 O&tline of the follo4in# "hapters+++++++++++++++++++++++++++++++++++++++++++++++++8
2+ De"ision pro"esses++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++9
2+1 5onor"et +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++9
2+2 Moern se.&ential moels +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++9
2+3 3on-se.&ential
moels+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++10
2+4 !he phases of pra"ti"al e"isions 6 an of e"ision theory
+++++++++12
3+ De"iin# an
val&in#++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++13
3+1 $elations an n&m/ers
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++13
3+2 !he "omparative val&e terms
+++++++++++++++++++++++++++++++++++++++++++++++++++++++14
3+3 5ompleteness
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++12
3+4 !ransitivity
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++17
3+5 8sin# preferen"es in e"ision-ma*in#
+++++++++++++++++++++++++++++++++++++++++19
3+2 3&meri"al representation
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++20
3+7 8sin# &tilities in e"ision-ma*in#
+++++++++++++++++++++++++++++++++++++++++++++++21
4+ !he stanar representation of inivi&al e"isions
++++++++++++++++++++++++++++++++23
4+1 0lternatives
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++23
4+2 O&t"omes an states of nat&re
+++++++++++++++++++++++++++++++++++++++++++++++++++++24
4+3 De"ision matri"es
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++25
4+4 %nformation a/o&t states of nat&re
+++++++++++++++++++++++++++++++++++++++++++++++22
5+ 9:pe"te &tility+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++29
5+1 ,hat is e:pe"te &tility-
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++29
5+2 O/1e"tive an s&/1e"tive &tility++++++++++++++++++++++++++++++++++++++++++++++++++++30
5+3 0ppraisal of
98++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++31
5+4 Pro/a/ility estimates
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++34
2+
;ayesianism++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++37
2+1 ,hat is ;ayesianism-
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++37
2+2 0ppraisal of ;ayesianism
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++40
7+ <ariations of e:pe"te &tility
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++45
7+1 Pro"ess &tilities an re#ret theory
++++++++++++++++++++++++++++++++++++++++++++++++45
2
7+2 Prospe"t theory
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++47
8+ De"ision-ma*in# &ner &n"ertainty
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++50
8+1 Parao:es of &n"ertainty
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++50
8+2 Meas&res of in"ompletely *no4n pro/a/ilities
+++++++++++++++++++++++++++52
8+3 De"ision "riteria for &n"ertainty
++++++++++++++++++++++++++++++++++++++++++++++++++55
9+ De"ision-ma*in# &ner
i#noran"e++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++59
9+1 De"ision r&les for ="lassi"al i#noran"e=
++++++++++++++++++++++++++++++++++++++59
9+2 8n*no4n possi/ilities
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++23
10+ !he emar"ation of e"isions
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++28
10+1 8nfinishe list of alternatives
++++++++++++++++++++++++++++++++++++++++++++++++++++28
10+2 %neterminate e"ision hori>ons
++++++++++++++++++++++++++++++++++++++++++++++++29
11+ De"ision insta/ility
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++73
11+1 5onitionali>e 98
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++73
11+2 3e4"om/?s parao:
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++74
11+3 %nsta/ility++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++72
12+ So"ial e"ision theory+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++79
12+1 !he /asi" insi#ht
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++79
12+2 0rro4?s theorem
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++81
$eferen"es ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++8
2
3
Preface
!his te:t is a non-te"hni"al overvie4 of moern e"ision theory+ %t is
intene for &niversity st&ents 4ith no previo&s a".&aintan"e 4ith the
s&/1e"t@ an 4as primarily 4ritten for the parti"ipants of a "o&rse on ris*
analysis at 8ppsala 8niversity in 1994+
Some of the "hapters are revise versions from a report 4ritten in
1990 for the S4eish 3ational ;oar for Spent 3&"lear A&el+
8ppsala@ 0&#&st 1994
Sven Ove Hansson
4
1. What is decision theory?
De"ision theory is theory a/o&t e"isions+ !he s&/1e"t is not a very &nifie
one+ !o the "ontrary@ there are many ifferent 4ays to theori>e a/o&t
e"isions@ an therefore also many ifferent resear"h traitions+ !his te:t
attempts to refle"t some of the iversity of the s&/1e"t+ %ts emphasis lies on
the less 'mathemati"ally) te"hni"al aspe"ts of e"ision theory+
1.1 Theoretical questions about decisions
!he follo4in# are e:amples of e"isions an of theoreti"al pro/lems that
they #ive rise to+
Shall I bring the ubrella today? 6 !he e"ision epens on
somethin# 4hi"h % o not *no4@ namely 4hether it 4ill rain or not+
I a loo!ing for a house to buy. Shall I buy this one? 6 !his
ho&se loo*s fine@ /&t perhaps % 4ill fin a still /etter ho&se for the
same pri"e if % #o on sear"hin#+ ,hen shall % stop the sear"h
pro"e&re-
A I going to so!e the ne"t cigarette? 6 One sin#le "i#arette is
no pro/lem@ /&t if % ma*e the same e"ision s&ffi"iently many times
it may *ill me+
The court has to decide #hether the defendent is guilty or not. 6
!here are t4o mista*es that the "o&rt "an ma*e@ namely to "onvi"t
an inno"ent person an to a".&it a #&ilty person+ ,hat prin"iples
sho&l the "o&rt apply if it "onsiers the first of this mista*es to /e
more serio&s than the se"on-
A coittee has to a!e a decision$ but its ebers ha%e
different o&inions+ 6 ,hat r&les sho&l they &se to ens&re that they
"an rea"h a "on"l&sion even if they are in isa#reement-
0lmost everythin# that a h&man /ein# oes involves e"isions+ !herefore@
to theori>e a/o&t e"isions is almost the same as to theori>e a/o&t h&man
5
a"tivitities+ Ho4ever@ e"ision theory is not .&ite as all-em/ra"in# as that+
%t fo"&ses on only some aspe"ts of h&man a"tivity+ %n parti"&lar@ it fo"&ses
on ho4 4e &se o&r freeom+ %n the sit&ations treate /y e"ision theorists@
there are options to "hoose /et4een@ an 4e "hoose in a non-ranom 4ay+
O&r "hoi"es@ in these sit&ations@ are #oal-ire"te a"tivities+ Hen"e@
e"ision theory is "on"erne 4ith goal-directed behaviour in the presence
of options+
,e o not e"ie "ontin&o&sly+ %n the history of almost any a"tivity@
there are perios in 4hi"h most of the e"ision-ma*in# is mae@ an other
perios in 4hi"h most of the implementation ta*es pla"e+ De"ision-theory
tries to thro4 li#ht@ in vario&s 4ays@ on the former type of perio+
1.' A truly interdisci&linary sub(ect
Moern e"ision theory has evelope sin"e the mile of the 20th "ent&ry
thro&#h "ontri/&tions from several a"aemi" is"iplines+ 0ltho&#h it is no4
"learly an a"aemi" s&/1e"t of its o4n ri#ht@ e"ision theory is typi"ally
p&rs&e /y resear"hers 4ho ientify themselves as e"onomists@ statisti"ians@
psy"holo#ists@ politi"al an so"ial s"ientists or philosophers+ !here is some
ivision of la/o&r /et4een these is"iplines+ 0 politi"al s"ientist is li*ely to
st&y votin# r&les an other aspe"ts of "olle"tive e"ision-ma*in#+ 0
psy"holo#ist is li*ely to st&y the /ehavio&r of inivi&als in e"isions@ an
a philosopher the re.&irements for rationality in e"isions+ Ho4ever@ there
is a lar#e overlap@ an the s&/1e"t has #aine from the variety of methos
that resear"hers 4ith ifferent /a"*#ro&ns have applie to the same or
similar pro/lems+
1.) *orati%e and descri&ti%e theories
!he istin"tion /et4een normative an descriptive e"ision theories is@ in
prin"iple@ very simple+ 0 normative e"ision theory is a theory a/o&t ho4
e"isions sho&l /e mae@ an a es"riptive theory is a theory a/o&t ho4
e"isions are a"t&ally mae+
!he =sho&l= in the fore#oin# senten"e "an /e interprete in many
4ays+ !here is@ ho4ever@ virt&ally "omplete a#reement amon# e"ision
s"ientists that it refers to the prere.&isites of rational e"ision-ma*in#+ %n
other 4ors@ a normative e"ision theory is a theory a/o&t ho4 e"isions
sho&l /e mae in orer to /e rational+
2
!his is a very limite sense of the 4or =normative=+ 3orms of
rationality are /y no means the only 6 or even the most important 6 norms
that one may 4ish to apply in e"ision-ma*in#+ Ho4ever@ it is pra"ti"e to
re#ar norms other than rationality norms as e:ternal to e"ision theory+
De"ision theory oes not@ a""orin# to the re"eive opinion@ enter the
s"ene &ntil the ethi"al or politi"al norms are alreay fi:e+ %t ta*es "are of
those normative iss&es that remain even after the #oals have /een fi:e+
!his remainer of normative iss&es "onsists to a lar#e part of .&estions
a/o&t ho4 to a"t in 4hen there is &n"ertainty an la"* of information+ %t
also "ontains iss&es a/o&t ho4 an inivi&al "an "oorinate her e"isions
over time an of ho4 several inivi&als "an "oorinate their e"isions in
so"ial e"ision pro"e&res+
%f the #eneral 4ants to 4in the 4ar@ the e"ision theorist tries to tell
him ho4 to a"hieve this #oal+ !he .&estion 4hether he sho&l at all try to
4in the 4ar is not typi"ally re#are as a e"ision-theoreti"al iss&e+
Similarly@ e"ision theory provies methos for a /&siness e:e"&tive to
ma:imi>e profits an for an environmental a#en"y to minimi>e to:i"
e:pos&re@ /&t the /asi" .&estion 4hether they sho&l try to o these thin#s
is not treate in e"ision theory+
0ltho&#h the s"ope of the =normative= is very limite in e"ision
theory@ the istin"tion /et4een normative 'i+e+ rationality-normative) an
es"riptive interpretations of e"ision theories is often /l&rre+ %t is not
&n"ommon@ 4hen yo& rea e"ision-theoreti"al literat&re@ to fin e:amples
of ist&r/in# am/i#&ities an even "onf&sions /et4een normative an
es"riptive interpretations of one an the same theory+
Pro/a/ly@ many of these am/i#&ities "o&l have /een avoie+ %t
m&st /e "on"ee@ ho4ever@ that it is more iffi"&lt in e"ision s"ien"e
than in many other is"iplines to ra4 a sharp line /et4een normative an
es"riptive interpretations+ !his "an /e "learly seen from "onsieration of
4hat "onstit&tes a falsifi"ation of a e"ision theory+
%t is fairly o/vio&s 4hat the "riterion sho&l /e for the falsifi"ation
of a es"riptive e"ision theory+
'A1) 0 e"ision theory is falsified as a descriptive theory if a e"ision
pro/lem "an /e fo&n in 4hi"h most h&man s&/1e"ts perform in
"ontrai"tion to the theory+
7
Sin"e a normative e"ision theory tells &s ho4 a rational a#ent sho&l a"t@
falsifi"ation m&st refer to the i"tates of rationality+ %t is not evient@
ho4ever@ ho4 stron# the "onfli"t m&st /e /et4een the theory an rational
e"ision-ma*in# for the theory to /e falsifie+ % propose@ therefore@ the
follo4in# t4o efinitions for ifferent stren#ths of that "onfli"t+
'A2) 0 e"ision theory is weakly falsified as a normative theory if a
e"ision pro/lem "an /e fo&n in 4hi"h an a#ent "an perform in
"ontrai"tion 4ith the theory 4itho&t /ein# irrational+
'A3) 0 e"ision theory is strictly falsified as a normative theory if a
e"ision pro/lem "an /e fo&n in 4hi"h an a#ent 4ho performs in
a""oran"e 4ith the theory "annot /e a rational a#ent+
3o4 s&ppose that a "ertain theory T has 'as is often the "ase) /een
pro"laime /y its inventor to /e vali /oth as a normative an as a
es"riptive theory+ A&rthermore s&ppose 'as is also often the "ase) that 4e
*no4 from e:periments that in e"ision pro/lem P@ most s&/1e"ts o not
"omply 4ith T+ %n other 4ors@ s&ppose that 'A1) is satisfie for T+
!he /eliefs an /ehavio&rs of e"ision theoreti"ians are not *no4n
to /e rai"ally ifferent from those of other h&man /ein#s+ !herefore it is
hi#hly pro/a/le that at least some of them 4ill have the same "onvi"tions
as the ma1ority of the e:perimental s&/1e"ts+ !hen they 4ill "laim that 'A2)@
an perhaps even 'A3)@ is satisfie+ ,e may@ therefore@ e:pe"t es"riptive
falsifi"ations of a e"ision theory to /e a""ompanie /y "laims that the
theory is invali from a normative point of vie4+ %nee@ this is 4hat has
often happene+
1.+ ,utline of the follo#ing cha&ters
%n "hapter 2@ the str&"t&re of e"ision pro"esses is is"&sse+ %n the ne:t
t4o "hapters@ the stanar representation of e"isions is intro&"e+ ,ith
this /a"*#ro&n@ vario&s e"ision-r&les for inivi&al e"ision-ma*in# are
intro&"e in "hapters 5-10+ 0 /rief intro&"tion to the theory of "olle"tive
e"ision-ma*in# follo4s in "hapter 11+
8
'. Decision &rocesses
Most e"isions are not momentary+ !hey ta*e time@ an it is therefore
nat&ral to ivie them into phases or sta#es+
'.1 Condorcet
!he first #eneral theory of the sta#es of a e"ision pro"ess that % am a4are
of 4as p&t for4ar /y the #reat enli#htenment philosopher 5onor"et
'1743-1794) as part of his motivation for the Aren"h "onstit&tion of 1793+
He ivie the e"ision pro"ess into three sta#es+ %n the first sta#e@ one
Bis"&sses the prin"iples that 4ill serve as the /asis for e"ision in a
#eneral iss&eC one e:amines the vario&s aspe"ts of this iss&e an the
"onse.&en"es of ifferent 4ays to ma*e the e"ision+D 0t this sta#e@ the
opinions are personal@ an no attempts are mae to form a ma1ority+ 0fter
this follo4s a se"on is"&ssion in 4hi"h Bthe .&estion is "larifie@
opinions approa"h an "om/ine 4ith ea"h other to a small n&m/er of more
#eneral opinions+D %n this 4ay the e"ision is re&"e to a "hoi"e /et4een a
mana#ea/le set of alternatives+ !he thir sta#e "onsists of the a"t&al "hoi"e
/et4een these alternatives+ '5onor"et@ E1793F 1847@ pp+ 342-343)
!his is an insi#htf&l theory+ %n parti"&lar@ 5onor"et?s istin"tion /et4een
the first an se"on is"&ssion seems to /e a very &sef&l one+ Ho4ever@ his
theory of the sta#es of a e"ision pro"ess 4as virt&ally for#otten@ an oes
not seem to have /een referre to in moern e"ision theory+
'.' -odern sequential odels
%nstea@ the startin#-point of the moern is"&ssion is #enerally ta*en to /e
Gohn De4ey?s 'E1910F 1978@ pp+ 234-241) e:position of the sta#es of
pro/lem-solvin#+ 0""orin# to De4ey@ pro/lem-solvin# "onsists of five
"onse"&tive sta#esH '1) a felt iffi"&lty@ '2) the efinition of the "hara"ter of
that iffi"&lty@ '3) s&##estion of possi/le sol&tions@ '4) eval&ation of the
s&##estion@ an '5) f&rther o/servation an e:periment leain# to
a""eptan"e or re1e"tion of the s&##estion+
Her/ert Simon '1920) moifie De4ey?s list of five sta#es to ma*e it
s&ita/le for the "onte:t of e"isions in or#ani>ations+ 0""orin# to Simon@
9
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