Decision Theory

Decision Theory

Much information referencing decision theory and the decision-making process has been published. With that being said, information that gives a precise definition of decision theory is not readily available. Due to the lack of information relating specifically to decision theory, researchers have published a variety of different ways to theorize about the decision-making process and the elements involved in the process. In order to fully understand the different theories associated with decision theory, an individual must first educate themselves on the history behind the theory.

History of Decision Theory

History associated with the decision theory has been published by Samuel Kovaic and Andres Sousa-Pouza, educators at Old Dominion University and associates of the Northeast Region Decision Sciences Institute (NEDSI). Kovaic and Sousa-Pouza (2010) provided a chronological history of the process through which knowledge is produced for decision theory. Condorcet (1793, 1847) was the first, and most notable, philosopher associated with decision theory. He hypothesized that discussion, clarification, and choice were the three stages involved in the decision process. He took an enlightened position, by revealing that the nature of decision making was intransitive and suggesting that individuals made decisions that were chronologically bounded.

John Dewey (1910) hypothesized that there were five consecutive stages in the decision process. The five stages postulated by Dewey were:

1. "A felt difficulty,

2. The definition of the character of that difficulty,

3. Suggestion of possible solutions,

4. Evaluation of the suggestion, and

5. Further observation and experiment" (Kovacic & Sousa-Poza, 2010, p. 494).

Dewey's approach, along with science's dominant influence on the decision process and society's demand for knowledge that is quantifiable, were well assimilated.

Herbert Simon (1960) made modifications to Dewey's work. His modifications and three phase proposal, including intelligence, design, and choice, was designed to facilitate organizational decisions. Orville (1962) also added to Dewey's work. His additions included a five stage decision making process. The stages in Brim's process were to:

1. Identify the problem,

2. Obtain information relating to the problem,

3. Produce potential solutions,

4. Evaluate the potential solutions, and

5. Select a strategy to solve the problem.

Henry Mintzberg (1976) introduced a perspective that was differed drastically from his predecessors. His perspective proposed that decision process was not a sequential process, but rather a parallel one. The phases in his proposal were identical those in Simon's proposal; however, Mintzberg advised that the phases were routine and their progression in the decision making process were circular, not linear, which is what Simon has suggested.

In the 1980's, there was a new influence on the decision making process introduced. Naturalistic decision making was introduced by Gary Klein. This approach to the decision making process proposed that the observer should be in the center of the decision space. This approach also suggested that there were contextual factors, such as high personal stakes, ill-defined goals, time pressure, and uncertainty, which had an influence on individual's making decisions. Klein's method was another radical change in the decision making process because the establishment of the contextual factors were required to come from within (Kovacic & Sousa-Poza, 2010).

Definition of Decision Theory

Despite the fact that there is no formal definition of decision theory, an individual can explore research and produce a compiled definition. Cooper and Schindler (2011, p. 86) provide a vague description of decision theory by stating that "a rational way to approach the decision is to try to assess the outcomes of each action". An individual is expected to choose the action that has the best possible outcome for their particular situation. The criterion used in establishing how an individual will judge their potential outcomes include a decision variable and a decision rule. The decision variable is most often expressed with a quantifiable measure. The decision rule provides an individual with a guideline for which alternative they should choose. Each alternative must be evaluated using the following steps:

1. "Each alternative is explicitly stated,

2. A decision variable is defined by an outcome that may be measured, and

3. A decision rule is determined by which outcomes may be compared" (Cooper & Schindler, 2011, p. 87).

Awni Zebda, educator at Texas A&M-Corpus Christi, suggests that decision are either made under risk or under ambiguity. Decisions made under risk are those that have known probabilities, as well as precise payoffs, states of nature that are well defined, and precision levels that remain constant. Decisions made under ambiguity have probably that are inexact, payoffs that are not precise, fuzzy states of nature, and imprecise precision levels. Zebda suggests that decision theory has four requirements. These requirements are:

1. Precise probability judgments

2. Well-defined states of nature

3. Precise payoffs

4. Levels of accuracy that are precise

Zebda recognizes that most of these requirements are not always guaranteed in the accounting field and that many decisions that accounting professionals will have to make include characteristics of an ambiguous decision. He states "ambiguity is an important characteristic of many accounting problems and, thus, the failure to deal with ambiguity may lead to incomplete and unrealistic representation of decision problems. More importantly, ambiguity should not be ignored for it affects decisions" (Zebda, 2011, p. 4).

Criteria of a Decision

Individuals are constantly making decisions. Samuel D. Bond, educator at Georgia Institute of Technology, Kurt A. Carlson and Ralph L. Keeney, educators at Duke University, notate that this is true because the decision-making