Lecture 1 – Normative Decision Theory
What is a decision?
Difficult to provide a general definition
Yates, Veinott & Patalana (2003): A decisions is a commitment to a course of action that is intended to produce a satisfying state of affairs Better to identify components of a decision situation
Choice between actions (and also inaction)
Usually Goal Orientated – the action is taken to produce favorable outcomes Requires people to evaluate possible outcomes
However, there are many more features than this that differentiate decisions situations Other Common Typologies
Strategic, Tactical, Operational Decisions
Strategic: Involve the general direction taken by an individual or organization, often determine how decisions that follow should be taken, they often take some time to make and involve outcomes that occur in the long term Tactical: Decisions involve the implementation of strategy and represent the stream of smaller scale decisions that usually take a shorter time to make and associated with outcomes that occur in the shorter term Operational: Involve the day-to-day decisions making needed to execute plans and tactics. In organizations senior managers tend to make the strategic decisions and more junior managers the tactical and operational decisions
Structured and Unstructured Decisions
Unstructured: Occur when there is a general understanding of the need to act, but no clear idea about what the relevant goals/objectives are, the alternative actions that are available or how they should be evaluated Structured: Involve clear objectives, clearly defined choice set and how the alternatives are to be evaluated
Risky and Riskless Decisions
Risky: Don’t know which of several outcomes may occur. For example, investment depends on whether there is a change in the economy. This involves risk and uncertainty Riskless: Outcomes known (know what we get if we choose something). The heart of this decisions is knowing which is the best value...
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