Subjectivity in Decision Analysis

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Subjectivity in Decision Analysis

• David L. Olson
• James H.K. Stuart Professor in MIS
• University of Nebraska Lincoln

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Rational Choice TheoryK. Morrell, Journal of
Business Ethics 2004

• Dominant model for business decision making
• Compared with Image Theory
• Utilitarian ethics
• both consistent
• Kantian ethics
• Image theory yes, RCT no
• Virtue-based ethics
• Image theory yes, RCT no

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Ideal

• Objective measures
• Max Weber
• Accurate preference input
• Rational decision maker
• Accounting Jensen - Agency Theory
• Economics Williamson - Transaction Cost Analysis

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Basic Preference Model

• Can use multiplicative model for interactions

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Objective Measures

• Objective preferred
• can measure
• past profit, after tax
• Subjective
• know conceptually, but cant accurately measure
• response to advertising

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Problems with Objective Approach

• von Neumann Morgenstern 1944 Theory of Games
  utility is measurable
• Georgescu-Roegen 1954 The Quarterly Journal of
  Economics requires to many assumptions of
  rationality
• Lindblom 1965 Public Administration Review
  muddling through
• Morgenstern 1972 Journal of Economic Literature
  13 critical points
• uncertainty
• ambiguity
• disagreement in groups

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EMPIRICAL EVIDENCE

• contrary to rational choice models
• Braybrooke Lindblom 1969 Simon 1985 Payne,
  et al. 1993
• Some problems never reach decision maker
• decision makers often have simple maps of real
  problems
• all alternatives not known, so decision makers do
  not have full, relevant information
• individual altruism
• Tversky 1969
• systematic predictable economic
  intransitivities
• Kahneman, Slovic Tversky 1982
• people use heuristics rather than follow rational
  model

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James G. March

• Bell Journal of Economics 1978
• Rational choice involves guesses
• About future consequences of current actions
• About future preferences of those consequences
• Administrative Science Quarterly 1996
• Alternatives their consequences arent given,
  but need to be discovered estimated
• Bases of action arent reality, but perceptions
  of reality
• Supplemental exchange theories emphasize the role
  of institutions in defining terms of rationality

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Overview

• Inputs to preference models involve subjectivity
• Weights are function of individual
• Scores also valued from perspective of individual
• Subjective assessment MAY be more accurate
• Purpose of analysis should be to design better
  alternatives

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Means to Cope

• Payne, Bettman Johnson 1993
• strategy will differ by number of alternatives
• few - focus on all relevant information
• many - noncompensatory simplifying heuristics
• /lives tradeoff varies by context
• Hogarth many find explicit tradeoffs
  uncomfortable
• PROSPECT THEORY initial analysis simple, weed
  out for selected alternatives, more detailed
• As people learn more about problem structure,
  construct choice strategies

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Objective/Subjective

• OBJECTIVE what is convenient to model
• ideal - eliminate bias, arbitrary judgment
• extreme cost/benefit analysis spanning years of
  measuring the unmeasurable
• SUBJECTIVE what people do to cope
• value is subjective after all anyway
• value is what MAUT, MCDA seeks to measure

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ACCURATE PREFERENCE INPUT

• incomplete information
• uncertain measures
• uncertain preferences
• group participation
• risk
• time pressure Edwards - how can you calculate
  expected utility in available time?
• change competition complexity

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RELATIONSHIP TO MCDA

• We shouldnt expect so much theoretical purity
• the world has shifted away from appreciation of
  numerical analysis
• Just because assumptions are not met doesnt mean
  pure approach better

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MCDA Methods

• Multiattribute utility theory
• Analytic hierarchy process
• Outranking
• ELECTRE, PROMETHEE
• Fuzzy, DEA, Verbal Decision Analysis
• Image Theory

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Spectrum

• MAUT with strictly objective measures
• MAUT with constructed measures
• Likert scales
• SMART - swing weighting rather than lottery
  tradeoffs
• AHP - ratios of subjective scale

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PROMETHEE Spectrum

• Class I ordinal
• Class II step advantage
• Class III proportional advantage (in range)
• Class IV three step
• Class V proportional with indifference
• range
• Class VI normal distribution

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MAUT Hierarchy

• Overall

Cost billions
Lives lost Expected value
Risk Probability of major catastrophe
Civic improvement Families with upgraded housing
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Objective Measures
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Swing Weighting
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SMART with swing weighting
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Logical Decision

• Hierarchy of criteria
• Single-attribute Utility Functions
• Worst imaginable utility 0
• Best imaginable utility 1
• Assess 0.5 level of either value or utility
• Tradeoffs
• Pairwise comparisons
• Select preferred extreme
• Improve other until equal

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SUF for Lives LostPROBLEM sensitive to limits
set may warp values more than intended
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Weight TradeoffsPROBLEM weights reflect both
choices, scale again hard to control

• Cost lt Lives Lost
• 0,1000gt500,0 0,10005,1000
• Cost lt Risk
• 0,1gt500,0 0,0.35500,0
• Cost gt Civic Improvement
• 0,100000gt500,0 0,100000350,0
• Weights (including scale)
• Risk 5.029
• Cost 1.577
• Lives Lost 29.337
• Civic Improvement 64.058

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Tradeoff Cost vs. Civic Improvement
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Result
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Contributions by Criteria
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Rock Springs vs. Newark
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Subjective Ratings
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Subjective SMART
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Output Comparisons
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Comparison with SMART

• Simpler allows decision maker to see exactly what
  ratings are
• MAUT
• Distrusts human masks tradeoffs in effort to
  make objective
• Objective here means have no idea
• Theoretically, preferences will be identical
• Does allow for nonlinear interaction, but severe
  impact
• My contention
• DIRECT IS BETTER THAN MACHINE

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Image Theory
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Image Theory process

• Frame decision
• Desired states
• Actions needed to attain desired states
• MORE CRITERIA
• Helpful to MCDA in structuring
• Context
• Elicit participation of as many views as possible
• Identify alternatives
• Design an ideal rather than settle for existing
• MORE ALTERNATIVES

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Verbal Decision Analysis

• Controlled pairwise comparisons of tradeoffs
• Focus on critical criteria
• Dont use falsely precise measures
• Fuzzify categorical ratings
• Screen alternatives
• Preemptive
• Focus on critical tradeoffs

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VDA Process

• Eliminate very high lives lost
• Newark eliminated
• Eliminated risk high or worse
• Nome eliminated
• Rock Springs now dominates Duquesne
• FOCUS ON
• Rock Springs
• Gary
• TRADEOFFS
• Rock Springs a little lower cost, improved
  lives lost
• Gary civic improvement slightly better

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Inferences

• Objective cant capture all the complexity of
  real decisions
• OBJECTIVES ARE ALWAYS LEFT OUT
• Conventional wisdom at most 7 matter
• BUT THERE IS NO PARETO OPTIMAL unless all
  considered
• When Groups are involved, THERE IS NO ONE BEST
  DECISION
• Ward Edwards never saw a group pick an option
  that was first choice of one subgroup
• NEGOTIATION

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Conclusion

• Measures of alternative future performance,
  preference for that performance both subjective
• Objective measures not always better
• Focus should be on
• Learning (changing preference)
• Design of better alternatives (Image Theory)