Decision Theory ... Part 1

The preceding text is part of the contents of the book "Decision making in restaurants”Available at bookstores. I hope it will be you useful.

In our life, both personally and professionally, there are many situations and events that require the adoption of strategic. Each person makes routine decisions in their daily life such as: what time to get up, what clothes to wear, what program to listen to, etc. These decisions are made automatically and only require intuition and common sense, the consequences of a wrong decision sometimes being of little importance.

The most important personal and professional decisions, on the other hand, cannot be made based on common sense or instant judgment. Common sense can be misleading and incorrect in certain cases, and quick decisions can have serious consequences.  If we take this to the economic plane, in particular to the activity of organizations that are productive or service, private or public, we see that they must contribute to solving basic problems of every society, and to face them, they must therefore make fundamental decisions referred to: what to produce, how much to produce, how to produce, for whom to produce, if they are productive companies, or what type of service consumers or the general population require, since it may be a public hospital service, in the event that the organization be of services.   
This means that, in the framework of the activity of the organizations, the administrator, manager, director, and leaders in general, must contribute to the achievement of the objectives of their organization, making many decisions regarding different aspects related to the management of it, such as:

  • The levels of production or services to be achieved in order to achieve the strategic objectives defined for the organization
  • Obtaining and efficient use of the organization's financial and human resources
  • The acquisition of the necessary resources to reach the levels established in the objectives
  • The ways and forms of organization of production and services as well as of supply
  • The organization of the distribution of products and services
  • Marketing policies and new products
  • Planning and control of new projects to carry out in the organization
The way in which these decisions are made influences the functioning of organizations and therefore the well-being of society. If you aspire to be a good administrator, it is evident that one of the skills to develop is decision making.
But what does it mean to make a decision? Intuitively, it can be said that "making a decision" implies "choosing" or "selecting" an alternative or course of action among a set of them.
One of the approaches in decision making is the so-called rational approach, which is the one that serves as the basis for quantitative methods. In this context, it should be specified what it means to act rationally. In his text “Elements of Administrators"  Koontz states that:
“People who act or decide rationally try to achieve a goal that cannot be achieved without positive action. To do this, they must know the alternative courses of action that can allow them to achieve this goal, under the existing circumstances and limitations. They must also have  the information and the ability to evaluate and analyze alternatives in the light of the goal sought and finally seek the best solution by selecting the alternative that most effectively satisfies the achievement of the goal ”.
It is precisely within this framework that it can be stated that the object of study of the so-called Theory of the decisionit is rational decision making. In its applied aspect, the theory of decision deals with the analysis of the decision process in each and every one of its component parts.  Its application presupposes proceeding in a systematic and precise way in which the alternative courses of action and the consequences that may result from each action are contemplated and evaluated.
As previously stated, the theory de the decision, in its broadest sense, aims at rational decision making. According to certain authors, the theory de the decision It has an empirical and normative science character, inasmuch as its conclusions are permanently subjected to the contrast of experience and its approaches also refer permanently to "what should be" in a clearly prescriptive sense.
On the other hand it can be said that the theory de the decision, focuses on texts from 2 points of view: as a process and as a quantitative technique.  In our course we will develop decision theory as a quantitative technique that supports decision making on problems that have certain characteristics.
In this sense, it can be stated that, the theory de the decision It constitutes a mathematical technique that allows determining the best alternative or course of action in order to solve a certain economic problem, fundamentally in situations for which the information is insecure or   practically non-existent.
Some authors classify it within Statistics and others within the investigation of Operations and is known under different names: Theory of the decision, Decision Analysis, Statistical Theory of the decision, Statistical Decision Theory, Bayesian Decision Theory and even Statistical Game Theory.
The essential aspect of the problems it addresses the theory de the decision is that, for its solution, only one alternative or course of action should be chosen among the possible ones, and the selection of said action must be made before it is known what event (external actions not subject to the decision maker's control) will occur.
We have all personally developed a process to deal with this type of problem, which is to take into account the consequences of the different actions (which presumably vary depending on the event that occurs) and the opportunities of the different events, for the search for the final decision. . That same technique is used by decision theory, whose conceptual framework is exactly the same as that used by any rational decision maker.  Before developing the mathematical techniques of decision theory, we will present a set of basic concepts that include the terminology generally accepted by the authors who treat this technique.                             
Proposing a precise and rigorous definition of the concept of decision is quite a complex problem. Indeed, we are faced with one of the terms that, so to speak, are “primary”, since, in fact, its meaning is known (or at least accepted) by the generality of scientists (and those who are not), although its meanings can be many. However, it is important to highlight that the idea of ​​"decision" in our context should not be confused with others that are quite close to it, such as "choice" or "selection".
For us, "decision" is going to mean a "choice" or "selection" based on criteria of some well-established character; that is, "decision" will involve a choice according to a body of criteria that includes not only prior knowledge of the range of options, but also an evaluation of the possible results and the existence of a decision-making body. This in turn implies that the decision-making conditions can give rise to clearly differentiated formulations, so we must be clear about the elements that make up a decision situation.
Most authors who deal with the theory de the decision agree that there are 5 basic elements that are present in  a decision situation. These elements are:
1.    The existence of a set of alternative decisions (actions, courses of action, strategies)
2.    A set of external actions faced by the decision maker, which are called states of nature, and which constitute the environment or structural context in which the problem arises.
3.    The Results obtained by the use of a certain alternative for possible states of nature
4.    The existence of a decision-maker who is responsible for proposing the selection criteria and applying them
5.    The degree of knowledge on the behavior of the states of nature
Of these elements, the first 3 are the intrinsic or essential elements of a decision, while the remaining 2 are more of a methodological nature. With regard to these elements, the following should be highlighted:                      
ALTERNATIVE DECISIONS: They are the alternatives, courses of action or strategies from which the decision maker must choose. They must be expressed in mutually exclusive terms.
STATES OF NATURE: These are external circumstances or actions that affect the outcome of a decision, but that are beyond the control of the decision maker. They are also called EVENTS, and should be expressed in mutually exclusive terms and be collectively exhaustive.
RESULTS: They can be expressed in economic terms (profit, cost, etc.) or in terms of some non-monetary measure such as preferences or rating scales.
El ENVIRONMENT of the decision: This environment can be specified, conventionally in three fundamental modalities:
ENVIRONMENT OF CERTAINTY OR CERTAINTY: We say that it occurs when the decision maker knows precisely, and a priori, the state of nature that is going to be presented.
ENVIRONMENT OF RISK: We say that it occurs when the set of states of nature is random, knowing the probability of occurrence of each of them.
ENVIRONMENT OF UNCERTAINTY: It occurs when the set of states of nature is random, but the probability of occurrence of each of them is unknown or cannot be established.
There are authors who include a fourth environment that they call “conflict”, assuming that instead of states of nature there is a “rational” opponent whose objective is to win. This situation is the object of study of the so-called Game Theory.
The above means that the theory de the decision It provides a useful way to classify the types of situations in which you can make a decision, based on the “environment” of the decision, that is, according to the knowledge you have about the set of states of nature.
According to this there are 4 decision-making situations: Certainty, Risk, Uncertainty and Conflict, which give rise to a way of classifying models for decision making. Hence, there is talk of models for decision-making in conditions (environment) of certainty, risk, uncertainty and conflict.
It should also be noted that, like any formal problem solving technique, decision theory can be applied only to problems that have certain characteristics. To summarize, the problems dealt with by decision theory are fundamentally decision-making problems at risk and uncertainty in which the decision maker is required to:

  • Know all the potential actions you can take, of which you must choose only one, before it is known what event will occur.
  • Know all the possible events or states of nature that may arise.
  • For each decision-event pair, be able to assign a valuation that represents the consequence, in monetary terms or not, of choosing that action and that event occurring.
The decision matrix, also called the payment matrix, provides an organized structure in which the three essential elements or parts of a decision situation appear, represented as follows:                      
Alternative Decisions
.   .  .  .  .
. . . . .
.  .  .  .  .
. . . . .
.  .  .  .  .
. . . . .
. . . . . . .
. . . . .
.  .  .  .  .
. . . . .
.  .  .  .  .
.  .  .  .
. . . . . . . .
. . . . .
Say: i-th alternative decision available to the decision maker
Ex: j-th state of nature or event
Pj: Probability that the state of nature will occur Ex
Rij: Result obtained if the alternative decision i is adopted and the state of nature occurs  j
In cases where the probability (uncertainty situation) is not known, the decision matrix will only be made up of alternative decisions, states of nature and results. Finally, it should be noted that in decision theory the so-called decision models are used, which are nothing more than criteria that serve to determine the best alternative, course of action or strategy in order to solve a given decision problem.  A particularly important reason to consider these models is knowledge of the approach and logic used in its application.

If you want to complete your knowledge on this subject, you can obtain in digital or printed format the book that contains these expanded contents, available at this link: 

I am a dreamer and in my dreams I believe that a better world is possible, that no one knows more than anyone, we all learn from everyone. I love gastronomy, numbers, teaching and sharing all the little I know, because by sharing I also learn. "Let's all go together from foundation to success"