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Organizational Announcements
- Exercises can be solved alone or in working groups (up to four members). Each working group member must individually submit solutions (for bonus points).
- For submitted solutions, students can receive four different grades: - 0,0 : Exercise sheet incomplete, bonus point exercise(s) not satisfactory - 0,1 : Exercise sheet incomplete, bonus point exercise(s) satisfactory - 1,0 : Exercise sheet complete, bonus point exercise(s) not satisfactory - 1,1 : Exercise sheet complete, bonus point exercise(s) satisfactory
- Six (50%) of the exercise sheets must be completed, in order to be admitted to the final exam.
- A maximum of 10 achieved bonus points will be added to the score of the final exam, but only if the exam is passed. 1
Types of Decision Making 2
Review of Last Lecture
- Elimination by aspects
- Lexicographic Criteria
- Semi-lexicographic Ordering
- Satisficing Principle
non-compensatory compensatory
- Even Swaps
- SMART
- Stochastic Dominance
Types of Decision Making: Procedures that one can analyze and compare according to some specified criteria.
The criteria could be related to the procedure itself or to the outcomes of the procedure.
If the criteria for a “good” procedure are known, one could even design a decision procedure.
Paul Goodwin and George Wright (2009): Decision Analysis for Management Judgment , 4th ed., ch. 2
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Business Decision Making
- Preferences and Decision Making -
Prof. Dr. Matthias Raith Chair of Entrepreneurship Otto-von-Guericke University Magdeburg http://www.entrepreneurship.ovgu.de
Preferences and Decision Making 4
Structure of the Course
**1. Introduction
- Types of Decision Making
- Preferences and Decision Making
- Multiattribute Decisions
- Decisions under Uncertainty
- Sequential Decision Making
- Strategic Interactive Decision Making
- Group Decision Making**
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Preferences and Decision Making 7
Change of Criteria
Example:
10 € used alternatively to buy a theater ticket, netflix, or a book.
Theater ticket netflix Repeated pleasure
Importance of education
Break from studies
netflix Book
Book Theater ticket
Preferences and Decision Making 8
Change of Frames
Imagine that you are about to purchase a stereo for 125 dollars and a calculator for 15 dollars. The salesman tells you that the calculator is on sale for 5 dollars less at the other branch of the store, located 20 minutes away. The stereo is the same price there. Would you make the trip to the other store?
A. MasColell, M.D. Whinston, J.R. Green: Microeconomic Theory , 1995
Imagine that you are about to purchase a stereo for 125 dollars and a calculator for 15 dollars. The salesman tells you that the stereo is on sale for 5 dollars less at the other branch of the store, located 20 minutes away. The calculator is the same price there. Would you make the trip to the other store? Because of a stockout you must travel to the other store to get the two items, but you will receive 5 dollars off on either item as compensation. Do you care on which item this 5 dollar rebate is given? x = Travel to the other store and get a 5 dollar rebate on the calculator. y = Travel to the other store and get a 5 dollar rebate on the stereo. z = Buy both items at the first store. x z and z y, butx y
x z
z y
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Preferences and Decision Making 9
Change of Meaning
Logic is better than Nothing;
Nothing is better than Sex.
Anthony Blair, Philosopher
Preferences and Decision Making 10
Group Decisions
a b c b c a c a b
Decision by simple majority vote: Who prefers a to b? 1 and 3 Who prefers b to c? 1 and 2 Who prefers c to a? 2 and 3
Group decisions based on simple majority vote may imply intransitive preferences, even though the preferences of each individual group member are transitive! Condorcet Paradox
Group of Decision Makers
Individual Rational Preference Profiles
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Preferences and Decision Making 13
Decision Problem
max ( )
s.t.
v a
a A
If the preferences of the decision maker can be characterized by a value function, then the decision problem can be formulated as constrained optimization problem.
This perspective takes the the set of alternatives as given. Alternative Focused Thinking
Preferences and Decision Making 14
Further (convenient) assumptions
v : A
v is twice continuously differentiable
v has a stationary point at a^ *^ , where v '( a *) 0.
v ''( a^ *^ ) 0 a *^ is amaximum point
v ''( a^ *^ ) 0 a *^ is aminimum point
A is a continuous set
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15
Objectives and Decision Contexts
S Strategic Objectives f Fundamental Objectives i Instrumental Objectives A, a Alternatives
a A
i
f
S
Preferences and Decision Making
Value Information
Factual Information
Decision Context
Ralph Keeney: Value-Focused Thinking. A Path to Creative Decision Making , 1992
Preferences and Decision Making
Strategic Objectives
- The highest, most general objectives
- remain stable over longer periods of life.
- are relevant for most decision contexts.
- Ultimate fundamental objectives
- must be unattainable, in order to retain the incentive to take action.
- must be approachable, in order to preserve their influence on behavior.
- Strategic objectives serve as ideals.
- Working hypothesis: A vision comprises a bundle of ideals. Russell L. Ackoff: The Art of Problem Solving , 1978 16
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Preferences and Decision Making
Network of Instrumental Objectives
Fundamental Objective
Instrumental Objective
Instrumental Objective
Instrumental Objective
Instrumental Objective
Instrumental Objective
Towards a Fundamental Objective „Why is that important?“ Away from a Fundamental Objective „How can this be achieved?“
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Preferences and Decision Making
Objective Hierarchies and Networks
Fundamental Objectives Instrumental Objectives
Direction: Downward in the hierarchy Away from fundamental objectives
Question: What exactly does this mean?
How can this be achieved?
Direction: Upward in the hierarchy Towards fundamental objectives
Question: Of which more general objective is this an aspect?
Why is that important?
R. T. Clemen, T. Reilly: Making Hard Decisions , 2001 20
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Preferences and Decision Making 21
Viewing Problems as Opportunities
- oblem
- bjectives
- lternatives
- onsequences
- radeoffs
Pr
O
A
C
T
Value focused thinking
Alternative focused thinking
Hammond, Keeney, Raiffa: Smart Choices , 1999
Preferences and Decision Making 22
Covey’s Habit 2:
Begin with the End in Mind
Value-Focussed Thinking
Alternative-Focussed Thinking
Reactive Problem Solving: Proactive Planning: Take the Best – make it reality
Conceptualization of a desired future and the search for ways to reach this state as effectively as possible.
Take whatever is available – choose the best alternative
Moving away from something undesired, does not bring you closer to something desired.
Unconstrained Thinking
Constrained Thinking
Russell L. Ackoff: The Art of Problem Solving , 1978
Stephen R. Covey: The Seven Habits of Highly Effective People, 1989
