{"id":2581,"date":"2010-11-07T17:55:18","date_gmt":"2010-11-07T17:55:18","guid":{"rendered":"http:\/\/meeseeks:5080\/blog\/?p=2581"},"modified":"2010-11-07T17:55:18","modified_gmt":"2010-11-07T17:55:18","slug":"good-decisions","status":"publish","type":"post","link":"https:\/\/vukutu.com\/blog\/2010\/11\/good-decisions\/","title":{"rendered":"Good decisions"},"content":{"rendered":"

Which decisions are good decisions?
\nSince 1945, mainstream economists have arrogated the word “rational” to describe a mode of decision-making which they consider to be best.\u00a0\u00a0 This method, called maximum-expected utility (MEU)<\/em> decision-making, assumes that the decision-maker has only a finite set of possible action-options and that she knows what these are, that she knows the possible consequences of each of these actions and can quantify (or at least can estimate) these consequences, and can do so on a single, common, numerical scale of value (the payoffs), that she knows a finite and complete collection of uncertain events that are possible and which may impact the consequences and their values, and knows (or at least can estimate) the probabilities of these uncertain events, again on a common numerical scale of uncertainty.\u00a0 The MEU decision procedure is then to quantify the consequences of each action-option, weighting them by the relative likelihood of their arising according to their probabilities of the uncertain events which influence them.
\nThe decision-maker then selects that action-option which has the maximum expected consequential value, ie the consequential value weighted by the probabilities of the uncertain events. Such decision-making, in an abuse of language that cries out for a criminal charges, is then called rational<\/strong> by economists.\u00a0\u00a0 Bayesian statistician Dennis Lindley even wrote a book about MEU which included the stunningly-arrogant sentence, \u201cThe main conclusion [of this book] is that there is essentially only one way to reach a decision sensibly.\u201d
\n<\/em>
\nRational?\u00a0 This method is not even feasible, let alone sensible or good!
\nFirst, where do all these numbers come from?\u00a0 With the explicit assumptions that I have listed, economists are assuming that the decision-maker has some form of perfect knowledge.\u00a0 Well, no one making any real-world decisions has that much knowledge.\u00a0 Of course, economists often respond, estimates can be used when the knowledge is missing.\u00a0 But whose estimates?\u00a0\u00a0 Sourced from where?\u00a0\u00a0 Updated when? Anyone with any corporate or public policy experience knows straight away that consensus on such numbers for any half-way important problem will be hard to find.\u00a0 Worse than that, any consensus achieved should immediately be suspected and interrogated, since it may be evidence of groupthink. \u00a0\u00a0 There simply is no certainty about the future, and if a group of people all do agree on what it holds, down to quantified probabilities and payoffs, they deserve the comeuppance they are likely to get!
\nSecond, the MEU principle simply averages across uncertain events.\u00a0\u00a0 What of action-options with potentially catastrophic outcomes?\u00a0\u00a0 Their small likelihood of occurrence may mean they disappear in the averaging process, but no real-world decision-maker – at least, none with any experience or common sense – would risk a catastrophic outcome, despite their estimated low probabilities. \u00a0 Wall Street trading firms have off-street (and often off-city) backup IT systems, and sometimes even entire backup trading floors, ready for those rare events.
\nThird, look at all the assumptions not made explicit in this framework.\u00a0 There is no mention of the time allowed for the decision, so apparently the decision-maker has infinities of time available.\u00a0 No mention is made of the processing or memory resources available for making the decision, so she has infinities of world also.\u00a0\u00a0 That makes a change from most real-world decisions:\u00a0 what a pleasant utopia this MEU-land must be.\u00a0 Nothing is said – at least nothing explicit – about taking into account the historical or other contexts of the decision, such as past decisions by this or related decision-makers, technology standards, legacy systems, organization policies and constraints, legal, regulatory or ethical constraints, or the strategies of the company or the society in which the decision-maker sits.\u00a0\u00a0 How could a decision procedure which ignores such issues be considered, even for a moment, rational?\u00a0\u00a0 I think only an academic could ignore context in this way; no business person I know would do so, since certain unemployment would be the result.\u00a0 And how could members of an academic discipline purporting to be a social science accept and disseminate a decision-making framework which ignores such social, contextual features?
\nAnd do the selected action-options just execute themselves?\u00a0 Nothing is said in this framework about consultation with stakeholders during the decision-process, so presumably the decision-maker has no one to report to, no board members or stockholders or division presidents or ward chairmen or electors to manage or inform or liaise with or mollify or reward or appease or seek re-election from, no technical departments to seek feasibility approval from, no implementation staff to motivate or inspire, no regulators or ethicists or corporate counsel to seek legal approval from, no funders or investors to raise finance from, no suppliers to convince to accept orders with, no distribution channels to persuade to schedule throughput with,\u00a0 no competitors to second-guess or outwit, and no actual, self-immolating protesters outside one’s office window to avert one’s eyes from and feel guilt about for years afterward.*
\nFor many complex decisions, the ultimate success or failure of the decision can depend significantly on the degree to which those having to execute the decision also support it.\u00a0 Consequently, the choice of a specific action-option (and the logical reasoning process used to select it) may be far less important for success of the decision than that key stakeholders feel that they have been consulted appropriately during the reasoning process.\u00a0 In other words, the quality of the decision may depend much more on how and with who the decision-maker reasons than on the particular conclusion she reaches.\u00a0\u00a0 Arguably this is true of almost all significant corporate strategy decisions and major public policy decisions:\u00a0 There is ultimately no point sending your military to prop up an anti-communist regime in South-East Asia, for example, if your own soldiers come to feel they should not be there (as I discuss here, regarding another decision to go to war<\/a>).
\nMainstream economists have a long way to go before they will have a theory of good decision-making.\u00a0\u00a0 In the meantime, it would behoove them to show some humility when criticizing the decision-making processes of human beings.**
\nNotes and Bibliography:<\/em>
\nOskar Lange [1945-46]:\u00a0 The scope and method of economics.\u00a0 The Review of Economic Studies<\/em>, 13 (1)<\/strong>: 19-32.
\nDennis Lindley [1985]:\u00a0 Making Decisions<\/em>.\u00a0 Second Edition. London, UK: John Wiley and Sons.
\nL James Savage [1950]: The Foundations of Statistics<\/em>.\u00a0 New York, NY, USA:\u00a0 Wiley.
\n* I’m sure Robert McNamara, statistician and decision-theory whizz kid, never considered the reactions of self-immolating protesters when making decisions early in his career, but having seen one outside his office window late in his time as Secretary of Defense he seems to have done so subsequently.
\n** <\/em>Three-toed sloth comments dialogically and amusingly on MEU theory here<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

Which decisions are good decisions? Since 1945, mainstream economists have arrogated the word “rational” to describe a mode of decision-making which they consider to be best.\u00a0\u00a0 This method, called maximum-expected utility (MEU) decision-making, assumes that the decision-maker has only a finite set of possible action-options and that she knows what these are, that she knows […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7,23,25,62],"tags":[],"class_list":["post-2581","post","type-post","status-publish","format-standard","hentry","category-argumentation","category-decision-theory","category-economics","category-planning","p1","y2010","m11","d07","h17"],"_links":{"self":[{"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/posts\/2581","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/comments?post=2581"}],"version-history":[{"count":0,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/posts\/2581\/revisions"}],"wp:attachment":[{"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/media?parent=2581"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/categories?post=2581"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vukutu.com\/blog\/wp-json\/wp\/v2\/tags?post=2581"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}