Decision-Making Theories and Models
Triple Bottom Line: People, Profit, Planet
Complementarity: The theory that when considering your available choices, there is an implied assumption of what else would exist that affects the choice. For example, the decision to buy or not to buy a new car if the roads in the neighborhood have potholes or are unreliable.
Constructive Theory: A theory focused on how you construct and learn the problem collaboratively as a team. How do we reconcile differences in values when framing a problem?
- Focuses on designing collaborative processes to better frame problems and evaluate candidate actions.
Descriptive Theory: A theory concerned with describing observed behaviors under the assumption that the decision-making agents are behaving under some consistent rules. How an everyday person makes their decisions (as influenced by heuristics and bias).
- Focuses on understanding behaviors and decision making.
- Deviations from rational choices.
Normative Theory: A theory concerned with rank ordering your options, while maximizing your values.
- How a perfectly rational agent would make decisions.
- Focuses on prescribing actions.
Assumptions: Decision maker is fully informed.
- Able to enumerate decisions, probabilities, and outcomes.
- Fully rational actor.
Discrete Choice: One category of decision making that focuses on problem evaluation. These tend to be more qualitative. The model involves choosing between two or more discrete alternatives.
Dynamic Integrated Climate-Economy (DICE) Model: An assessment model developed by William Nordhaus to measure impacts in a model that allows a costs and benefits analysis of taking steps to slow climate change. It examines the maximizing of the utility of global consumption with the intent of measuring how quickly can we decarbonize the global economy.
Wicked Problem: A problem that is difficult or impossible to solve. Traits: the planner has no right to be wrong, there is no definitive formulation, the “no stopping” rule, not true or false, every problem is unique, every problem is a symptom of another problem, consequences are unknown, decisions are irreversible, and problems cannot be enumerated.
Nordhaus vs. Stern Debate on Climate Change: Time value of money.
Net Present Value = SUM 𝑡=0->N ((Rt)/(1+i)^t)
How to calculate the EMV: E[X]=SUM(i) xi f(xi)
Decision Trees:
- Knowing all courses of actions.
- Knowing the probability distribution of outcomes.
- The outcomes at each chance node are MECE – mutually exclusive and collectively exhaustive.
- Only one option is selected at a decision node.
- Decision paths can be easily enumerated.
- Sequential decisions progress from left to right.
- Maximizing expected utility – choose the decision that leads to the highest expected utility.
Stochastic Dominance: Objective to be maximized. Strategy B always results in a slightly higher salary than Strategy A for a given cumulative probability value.
Deterministic Dominance: Objective to be maximized. If the worst payoff of strategy B is at least as good as that of the best payoff of strategy A, then strategy B deterministically dominates strategy A.
Complementarity: The theory that when considering your available choices, there is an implied assumption of what else would exist that affects the choice.
Substitutability: The marginal value of one good is equal to the marginal value of another good.