Decision analysis
Encyclopedia
Decision analysis is the discipline
comprising the philosophy
, theory
, methodology
, and professional
practice necessary to address important decisions
in a formal manner. Decision analysis includes many procedures
, methods, and tools for identifying, clearly representing, and formally assessing important aspects of a decision, for prescribing a recommended course of action by applying the maximum expected utility
action axiom
to a well-formed representation of the decision, and for translating the formal representation of a decision and its corresponding recommendation into insight for the decision maker
and other stakeholders.
, who since then, as a professor at Stanford University
, has been instrumental in developing much of the practice and professional application of DA.
Graphical
representation of decision analysis problems commonly use influence diagrams and decision trees. Both of these tools represent the alternatives available to the decision maker
, the uncertainty
they face, and evaluation measures representing how well they achieve their objectives
in the final outcome. Uncertainties are represented through probabilities and probability distributions. The decision maker
's attitude to risk is represented by utility functions and their attitude to trade-offs between conflicting objectives
can be made using multi-attribute value functions or multi-attribute utility
functions (if there is risk involved). In some cases, utility functions can be replaced by the probability of achieving uncertain aspiration levels. Decision analysis advocates choosing that decision whose consequences have the maximum expected utility (or which maximize the probability of achieving the uncertain aspiration level). Such decision analytic methods are used in a wide variety of fields, including business
(planning
, marketing
, and negotiation
), environmental remediation, health care
research
and management
, energy
exploration
, litigation and dispute resolution
, etc.
Decision analysis is used by major corporations to make multi-billion dollar capital investments. In 2010, Chevron won the Decision Analysis Society Practice Award for its use of decision analysis in all major decisions. In a video detailing Chevron's use of decision analysis, Chevron Vice Chairman George Kirkland notes that "decision analysis is a part of how Chevron does business for a simple, but powerful, reason: it works."
Some decision analyst
s, in turn, argue that their approach is prescriptive, providing a prescription of what actions to take based on sound logic
, rather than a descriptive approach, describing the flaws in the way people do make decisions. Critics cite the phenomenon of paralysis by analysis
as one possible consequence of over-reliance on decision analysis in organizations.
Studies have demonstrated the utility of decision analysis in creating decision-making algorithms that are superior to "unaided intuition".
Some areas within decision analysis deal with normative results that are provably optimal for specific quantifiable decisions. For example, the optimal order scheduling in a manufacturing facility or optimal hedging strategies are purely mathematical and their results are necessarily provable. The term "decision analytic" has often been reserved for decisions that do not appear to lend themselves to mathematical optimization methods. Methods like applied information economics
, however, attempt to apply more rigorous quantitative methods even to these types of decisions.
Discipline
In its original sense, discipline is referred to systematic instruction given to disciples to train them as students in a craft or trade, or to follow a particular code of conduct or "order". Often, the phrase "to discipline" carries a negative connotation. This is because enforcement of order –...
comprising the philosophy
Philosophy
Philosophy is the study of general and fundamental problems, such as those connected with existence, knowledge, values, reason, mind, and language. Philosophy is distinguished from other ways of addressing such problems by its critical, generally systematic approach and its reliance on rational...
, theory
Theory
The English word theory was derived from a technical term in Ancient Greek philosophy. The word theoria, , meant "a looking at, viewing, beholding", and referring to contemplation or speculation, as opposed to action...
, methodology
Methodology
Methodology is generally a guideline for solving a problem, with specificcomponents such as phases, tasks, methods, techniques and tools . It can be defined also as follows:...
, and professional
Professional
A professional is a person who is paid to undertake a specialised set of tasks and to complete them for a fee. The traditional professions were doctors, lawyers, clergymen, and commissioned military officers. Today, the term is applied to estate agents, surveyors , environmental scientists,...
practice necessary to address important decisions
Decision making
Decision making can be regarded as the mental processes resulting in the selection of a course of action among several alternative scenarios. Every decision making process produces a final choice. The output can be an action or an opinion of choice.- Overview :Human performance in decision terms...
in a formal manner. Decision analysis includes many procedures
Procedure (term)
A procedure is a sequence of actions or operations which have to be executed in the same manner in order to always obtain the same result under the same circumstances ....
, methods, and tools for identifying, clearly representing, and formally assessing important aspects of a decision, for prescribing a recommended course of action by applying the maximum expected utility
Utility
In economics, utility is a measure of customer satisfaction, referring to the total satisfaction received by a consumer from consuming a good or service....
action axiom
Action axiom
An action axiom is an axiom that embodies a criterion for recommending action. Action axioms are of the form "IF a condition holds, THEN the following should be done." Decision theory and, hence, decision analysis are based on the maximum expected utility action axiom...
to a well-formed representation of the decision, and for translating the formal representation of a decision and its corresponding recommendation into insight for the decision maker
Decision making
Decision making can be regarded as the mental processes resulting in the selection of a course of action among several alternative scenarios. Every decision making process produces a final choice. The output can be an action or an opinion of choice.- Overview :Human performance in decision terms...
and other stakeholders.
History and Methodology
The term decision analysis was coined in 1964 by Ronald A. HowardRonald A. Howard
Ronald A. Howard has been a professor at Stanford University since 1965. In 1964 he defined the profession of decision analysis, and since then has been developing the field as professor in the Department of Engineering-Economic Systems in the School of Engineering at Stanford.Howard directs...
, who since then, as a professor at Stanford University
Stanford University
The Leland Stanford Junior University, commonly referred to as Stanford University or Stanford, is a private research university on an campus located near Palo Alto, California. It is situated in the northwestern Santa Clara Valley on the San Francisco Peninsula, approximately northwest of San...
, has been instrumental in developing much of the practice and professional application of DA.
Graphical
Diagram
A diagram is a two-dimensional geometric symbolic representation of information according to some visualization technique. Sometimes, the technique uses a three-dimensional visualization which is then projected onto the two-dimensional surface...
representation of decision analysis problems commonly use influence diagrams and decision trees. Both of these tools represent the alternatives available to the decision maker
Decision making
Decision making can be regarded as the mental processes resulting in the selection of a course of action among several alternative scenarios. Every decision making process produces a final choice. The output can be an action or an opinion of choice.- Overview :Human performance in decision terms...
, the uncertainty
Uncertainty
Uncertainty is a term used in subtly different ways in a number of fields, including physics, philosophy, statistics, economics, finance, insurance, psychology, sociology, engineering, and information science...
they face, and evaluation measures representing how well they achieve their objectives
Goal
A goal is an objective, or a projected computation of affairs, that a person or a system plans or intends to achieve.Goal, GOAL or G.O.A.L may also refer to:Sport...
in the final outcome. Uncertainties are represented through probabilities and probability distributions. The decision maker
Decision making
Decision making can be regarded as the mental processes resulting in the selection of a course of action among several alternative scenarios. Every decision making process produces a final choice. The output can be an action or an opinion of choice.- Overview :Human performance in decision terms...
's attitude to risk is represented by utility functions and their attitude to trade-offs between conflicting objectives
Goal
A goal is an objective, or a projected computation of affairs, that a person or a system plans or intends to achieve.Goal, GOAL or G.O.A.L may also refer to:Sport...
can be made using multi-attribute value functions or multi-attribute utility
Utility
In economics, utility is a measure of customer satisfaction, referring to the total satisfaction received by a consumer from consuming a good or service....
functions (if there is risk involved). In some cases, utility functions can be replaced by the probability of achieving uncertain aspiration levels. Decision analysis advocates choosing that decision whose consequences have the maximum expected utility (or which maximize the probability of achieving the uncertain aspiration level). Such decision analytic methods are used in a wide variety of fields, including business
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
(planning
Planning
Planning in organizations and public policy is both the organizational process of creating and maintaining a plan; and the psychological process of thinking about the activities required to create a desired goal on some scale. As such, it is a fundamental property of intelligent behavior...
, marketing
Marketing
Marketing is the process used to determine what products or services may be of interest to customers, and the strategy to use in sales, communications and business development. It generates the strategy that underlies sales techniques, business communication, and business developments...
, and negotiation
Negotiation
Negotiation is a dialogue between two or more people or parties, intended to reach an understanding, resolve point of difference, or gain advantage in outcome of dialogue, to produce an agreement upon courses of action, to bargain for individual or collective advantage, to craft outcomes to satisfy...
), environmental remediation, health care
Health care
Health care is the diagnosis, treatment, and prevention of disease, illness, injury, and other physical and mental impairments in humans. Health care is delivered by practitioners in medicine, chiropractic, dentistry, nursing, pharmacy, allied health, and other care providers...
research
Research
Research can be defined as the scientific search for knowledge, or as any systematic investigation, to establish novel facts, solve new or existing problems, prove new ideas, or develop new theories, usually using a scientific method...
and management
Management
Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively...
, energy
Energy
In physics, energy is an indirectly observed quantity. It is often understood as the ability a physical system has to do work on other physical systems...
exploration
Exploration
Exploration is the act of searching or traveling around a terrain for the purpose of discovery of resources or information. Exploration occurs in all non-sessile animal species, including humans...
, litigation and dispute resolution
Dispute resolution
Dispute resolution is the process of resolving disputes between parties.-Methods:Methods of dispute resolution include:* lawsuits * arbitration* collaborative law* mediation* conciliation* many types of negotiation* facilitation...
, etc.
Decision analysis is used by major corporations to make multi-billion dollar capital investments. In 2010, Chevron won the Decision Analysis Society Practice Award for its use of decision analysis in all major decisions. In a video detailing Chevron's use of decision analysis, Chevron Vice Chairman George Kirkland notes that "decision analysis is a part of how Chevron does business for a simple, but powerful, reason: it works."
Controversy
Decision researchers studying how individuals research decisions have found that decision analysis is rarely used. High-stakes decisions, made under time pressure, are not well described by decision analysis.Some decision analyst
Decision Analyst
Decision Analyst is an American marketing research and consulting firm based in Arlington, Texas. It also operates the American Consumer Opinion online panel, which is made up of over seven million people....
s, in turn, argue that their approach is prescriptive, providing a prescription of what actions to take based on sound logic
Logic
In philosophy, Logic is the formal systematic study of the principles of valid inference and correct reasoning. Logic is used in most intellectual activities, but is studied primarily in the disciplines of philosophy, mathematics, semantics, and computer science...
, rather than a descriptive approach, describing the flaws in the way people do make decisions. Critics cite the phenomenon of paralysis by analysis
Analysis paralysis
The term "analysis paralysis" or "paralysis of analysis" refers to over-analyzing a situation, so that a decision or action is never taken, in effect paralyzing the outcome. A decision can be treated as over-complicated, with too many detailed options, so that a choice is never made, rather than...
as one possible consequence of over-reliance on decision analysis in organizations.
Studies have demonstrated the utility of decision analysis in creating decision-making algorithms that are superior to "unaided intuition".
Some areas within decision analysis deal with normative results that are provably optimal for specific quantifiable decisions. For example, the optimal order scheduling in a manufacturing facility or optimal hedging strategies are purely mathematical and their results are necessarily provable. The term "decision analytic" has often been reserved for decisions that do not appear to lend themselves to mathematical optimization methods. Methods like applied information economics
Applied information economics
Applied information economics is a decision analysis method developed by Douglas W. Hubbard and partially described in his book How to Measure Anything: Finding the Value of Intangibles in Business . AIE is a method for the practical application of several proven methods from decision theory and...
, however, attempt to apply more rigorous quantitative methods even to these types of decisions.
See also
- ChoiceChoiceChoice consists of the mental process of judging the merits of multiple options and selecting one of them. While a choice can be made between imagined options , often a choice is made between real options, and followed by the corresponding action...
- Decision analysis cycleDecision analysis cycleThe decision analysis cycle is the top-level procedure for carrying out a decision analysis. The traditional cycle consists of four phases:*basis development*determinisitic sensitivity analysis*probabilistic analysis*basis appraisal....
- Decision making softwareDecision making softwareDecision-making software is a term integrating decision analysis tools to facilitate a person's decision-making process, which results in a choice of a course of action or a variant among several alternatives...
- Decision modelDecision modelA decision method is an axiomatic system that contains at least one action axiom.Formulation is the first and often most challenging stage in using formal decision methods...
- Decision theoryDecision theoryDecision theory in economics, psychology, philosophy, mathematics, and statistics is concerned with identifying the values, uncertainties and other issues relevant in a given decision, its rationality, and the resulting optimal decision...
- Stochastic dominanceStochastic dominanceStochastic dominance is a form of stochastic ordering. The term is used in decision theory and decision analysis to refer to situations where one gamble can be ranked as superior to another gamble. It is based on preferences regarding outcomes...
- Decision treeDecision treeA decision tree is a decision support tool that uses a tree-like graph or model of decisions and their possible consequences, including chance event outcomes, resource costs, and utility. It is one way to display an algorithm. Decision trees are commonly used in operations research, specifically...
- Decision support
- Influence diagramInfluence diagramAn influence diagram is a compact graphical and mathematical representation of a decision situation...
- Multi-criteria decision analysisMulti-Criteria Decision AnalysisMultiple-criteria decision-making or multiple-criteria decision analysis is a sub-discipline of operations research that explicitly considers multiple criteria in decision-making environments. Whether in our daily lives or in professional settings, there are typically multiple conflicting criteria...
(MCDA) - Optimal decisionOptimal decisionAn optimal decision is a decision such that no other available decision options will lead to a better outcome. It is an important concept in decision theory. In order to compare the different decision outcomes, one commonly assigns a relative utility to each of them...
- Management science
- Analysis paralysisAnalysis paralysisThe term "analysis paralysis" or "paralysis of analysis" refers to over-analyzing a situation, so that a decision or action is never taken, in effect paralyzing the outcome. A decision can be treated as over-complicated, with too many detailed options, so that a choice is never made, rather than...
- Decision EngineeringDecision engineeringDecision Engineering is a framework that unifies a number of best practices for organizational decision making. It is based on the recognition that, in many organizations, decision making could be improved if a more structured approach were used...
External links
- Decision Analysis, a journal of the Institute for Operations Research and the Management Sciences
- Decision Analysis Society, a subdivision of the Institute for Operations Research and the Management Sciences specializing in Decision Analysis
- Decision Analysis in Health Care Online course from George Mason University providing free lectures and tools for decision analysis modeling in health care settings.
- Decision Analysis Affinity Group, DAAG, and informal group of DA practitioners who have a Conference annually to discuss ideas, best practices, etc. DAAG was started in 1995 by Tom Spradlin, John Palmer, and David Skinner.
- Decision Analysis Glossary