Decision analysis (DA) is the

discipline Discipline is the self-control that is gained by requiring that rules or orders be obeyed, and the ability to keep working at something that is difficult. Disciplinarians believe that such self-control is of the utmost importance and enforce a ...

comprising the

philosophy Philosophy ('love of wisdom' in Ancient Greek) is a systematic study of general and fundamental questions concerning topics like existence, reason, knowledge, Value (ethics and social sciences), value, mind, and language. It is a rational an ...

methodology In its most common sense, methodology is the study of research methods. However, the term can also refer to the methods themselves or to the philosophical discussion of associated background assumptions. A method is a structured procedure for bri ...

, and

professional A professional is a member of a profession or any person who work (human activity), works in a specified professional activity. The term also describes the standards of education and training that prepare members of the profession with the partic ...

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

axiom An axiom, postulate, or assumption is a statement that is taken to be true, to serve as a premise or starting point for further reasoning and arguments. The word comes from the Ancient Greek word (), meaning 'that which is thought worthy or ...

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 In psychology, decision-making (also spelled decision making and decisionmaking) is regarded as the cognitive process resulting in the selection of a belief or a course of action among several possible alternative options. It could be either ra ...

, and other corporate and non-corporate stakeholders.

History

In 1931, mathematical philosopher Frank Ramsey pioneered the idea of

subjective probability Bayesian probability ( or ) is an interpretation of the concept of probability, in which, instead of frequency or propensity of some phenomenon, probability is interpreted as reasonable expectation representing a state of knowledge or as quanti ...

as a representation of an individual’s beliefs or uncertainties. Then, in the 1940s, mathematician

John von Neumann John von Neumann ( ; ; December 28, 1903 – February 8, 1957) was a Hungarian and American mathematician, physicist, computer scientist and engineer. Von Neumann had perhaps the widest coverage of any mathematician of his time, in ...

and economist

Oskar Morgenstern Oskar Morgenstern (; January 24, 1902 – July 26, 1977) was a German-born economist. In collaboration with mathematician John von Neumann, he is credited with founding the field of game theory and its application to social sciences and strategic ...

developed an axiomatic basis for

utility theory In economics, utility is a measure of a certain person's satisfaction from a certain state of the world. Over time, the term has been used with at least two meanings. * In a Normative economics, normative context, utility refers to a goal or ob ...

as a way of expressing an individual’s preferences over uncertain outcomes. (This is in contrast to social-choice theory, which addresses the problem of deriving group preferences from individual preferences.) Statistician

Leonard Jimmie Savage Leonard Jimmie Savage (born Leonard Ogashevitz; 1917 – 1971) was an American mathematician and statistician. Economist Milton Friedman said Savage was "one of the few people I have met whom I would unhesitatingly call a genius." Education and ...

then developed an alternate axiomatic framework for decision analysis in the early 1950s. The resulting expected-utility theory provides a complete axiomatic basis for decision making under uncertainty. Once these basic theoretical developments had been established, the methods of decision analysis were then further codified and popularized, becoming widely taught (e.g., in business schools and departments of industrial engineering). The term "Decision Analysis" was first coined by Ronald A. Howard of

Stanford University Leland Stanford Junior University, commonly referred to as Stanford University, is a Private university, private research university in Stanford, California, United States. It was founded in 1885 by railroad magnate Leland Stanford (the eighth ...

in a 1966 paper titled Decision Analysis: Applied Decision Theory. A brief and highly accessible introductory text was published in 1968 by decision theorist

Howard Raiffa Howard Raiffa ( ; January 24, 1924 – July 8, 2016) was an American academic who was the Frank P. Ramsey Professor (Emeritus) of Managerial Economics, a joint chair held by the Business School and Harvard Kennedy School at Harvard University. He ...

of the

Harvard Business School Harvard Business School (HBS) is the graduate school, graduate business school of Harvard University, a Private university, private Ivy League research university. Located in Allston, Massachusetts, HBS owns Harvard Business Publishing, which p ...

. Subsequently, in 1976, Ralph Keeney and

extended the basics of utility theory to provide a comprehensive methodology for handling decisions involving trade-offs between multiple objectives. Engineering professor

Ron Howard Ronald William Howard (born March 1, 1954) is an American filmmaker and actor. Howard started his career as a child actor before transitioning to directing films. Over his six-decade career, Howard has received List of awards and nominations r ...

and decision analyst Jim Matheson then published, in 1977, a set of readings on decision analysis; this was expanded into a two-volume set in 1984. Subsequent textbooks and additional developments are documented below under

Further reading Further or furthur, alternatively farther, may refer to: * ''Furthur'' (bus), the Merry Pranksters' psychedelic bus *Further (band), a 1990s American indie rock band *Furthur (band) Furthur was an American rock band founded in 2009 by former G ...

. Although decision analysis is inherently interdisciplinary (involving contributions from mathematicians, philosophers, economists, statisticians, and cognitive psychologists), it has historically been considered a branch of

operations research Operations research () (U.S. Air Force Specialty Code: Operations Analysis), often shortened to the initialism OR, is a branch of applied mathematics that deals with the development and application of analytical methods to improve management and ...

. In 1980, the Decision Analysis Society was formed as a special interest group within Operations Research Society of America (ORSA), which later merged with The Institute of Management Sciences (TIMS) to become the Institute for Operations Research and the Management Sciences (INFORMS). Beginning in 2004, INFORMS has published a dedicated journal for these topics, Decision Analysis. Following along with these academic developments, decision analysis has also evolved into a mature professional discipline. The method has been used to support business and public-policy decision-making since the late 1950s; applications from 1990-2001 were reviewed in the inaugural issue of Decision Analysis. Decision analysis has been especially widely adopted in the pharmaceutical industry and the oil and gas industry, since both industries regularly need to make large high-risk decisions (e.g., about investing in development of a new drug or making a major acquisition).

Methodology

Framing is the front end of decision analysis, which focuses on developing an opportunity statement (what and why), boundary conditions, success measures, a decision hierarchy, strategy table, and action items. It is sometimes believed that the application of decision analysis always requires the use of quantitative methods. In reality, however, many decisions can be made using qualitative tools that are part of the decision-analysis toolbox, such as value-focused thinking, without the need for quantitative methods. The framing process may lead to the development of an

influence diagram An influence diagram (ID) (also called a relevance diagram, decision diagram or a decision network) is a compact graphical and mathematical representation of a decision situation. It is a generalization of a Bayesian network, in which not only ...

decision tree A decision tree is a decision support system, decision support recursive partitioning structure that uses a Tree (graph theory), tree-like Causal model, model of decisions and their possible consequences, including probability, chance event ou ...

. These are commonly used graphical representations of decision-analysis problems. These graphical tools are used to represent the alternatives available to the

, the uncertainties they involve, and how well the decision maker's objectives would be achieved by various final outcomes. They can also form the basis of a quantitative model when needed. For example, quantitative methods of conducting

Bayesian inference Bayesian inference ( or ) is a method of statistical inference in which Bayes' theorem is used to calculate a probability of a hypothesis, given prior evidence, and update it as more information becomes available. Fundamentally, Bayesian infer ...

and identifying optimal decisions using influence diagrams were developed in the 1980s, and are now incorporated in software. In a quantitative decision-analysis model, uncertainties are represented through

probabilities Probability is a branch of mathematics and statistics concerning Event (probability theory), events and numerical descriptions of how likely they are to occur. The probability of an event is a number between 0 and 1; the larger the probab ...

-- specifically, subjective probabilities. The decision maker's attitude to risk is represented by utility functions, and the attitude to trade-offs between conflicting objectives can be expressed 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 an uncertain aspiration level or "target".) Based on the axioms of decision analysis, the best decision to choose is the one whose consequences have the maximum expected utility (or that maximizes the probability of achieving the uncertain aspiration level). It is sometimes assumed that quantitative decision analysis can be applied only to factors that lend themselves easily to measurement (e.g., in natural units such as dollars). However, quantitative decision analysis and related methods, such as applied information economics, can also be applied even to seemingly intangible factors.

Decision analysis as a prescriptive approach

Prescriptive decision-making research focuses on how to make "optimal" decisions (based on the axioms of rationality), while descriptive decision-making research aims to explain how people actually make decisions (regardless of whether their decisions are "good" or optimal). Unsurprisingly, therefore, there are numerous situations in which decisions made by individuals depart markedly from the decisions that would be recommended by decision analysis. Some have criticized formal methods of decision analysis for allowing decision makers to avoid taking responsibility for their own decisions, and instead recommend reliance on intuition or "gut feelings". Moreover, for decisions that must be made under significant time pressure, it is not surprising that formal methods of decision analysis are of little use, with intuition and expertise becoming more important. However, when time permits, studies have demonstrated that quantitative algorithms for decision making can yield results that are superior to "unaided intuition". In addition, despite the known biases in the types of human judgments required for decision analysis, research has shown at least a modest benefit of training and feedback in reducing bias. Critics cite the phenomenon of paralysis by analysis as one possible consequence of over-reliance on decision analysis in organizations (the expense of decision analysis is in itself a factor in the analysis). However, strategies are available to reduce such risk. There is currently a great deal of interest in quantitative methods for decision making. However, many such methods depart from the axioms of decision analysis, and can therefore generate misleading recommendations under some circumstances, so are not truly prescriptive methods. Some of the most popular of such non-decision-analytic methods include fuzzy-set theory for the representation of uncertainties, and the analytic-hierarchy process for the representation of preferences or value judgments. While there may occasionally be justification for such methods in applications (e.g., based on ease of use), decision analysts would argue for multi-attribute utility theory as the gold standard to which other methods should be compared, based on its rigorous axiomatic basis. Although decision analysis has been frequently used in support of government decision making, it is important to note that the basic theory applies only to individual decision makers. There is unfortunately no axiomatic prescriptive theory comparable to decision analysis that is specifically designed for group or public-policy decisions. For more on this topic, see

group decision-making Group decision-making (also known as collaborative decision-making or collective decision-making) is a situation faced when individuals collectively make a choice from the alternatives before them. The decision is then no longer attributable to ...

for discussions of the behavioral issues involved in group decisions, and

social choice theory Social choice theory is a branch of welfare economics that extends the Decision theory, theory of rational choice to collective decision-making. Social choice studies the behavior of different mathematical procedures (social welfare function, soc ...

for theoretical considerations that can affect group decisions.

Applications

Decision-analytic methods have been used in a wide variety of fields, including

business Business is the practice of making one's living or making money by producing or Trade, buying and selling Product (business), products (such as goods and Service (economics), services). It is also "any activity or enterprise entered into for ...

(

planning Planning is the process of thinking regarding the activities required to achieve a desired goal. Planning is based on foresight, the fundamental capacity for mental time travel. Some researchers regard the evolution of forethought - the cap ...

marketing Marketing is the act of acquiring, satisfying and retaining customers. It is one of the primary components of Business administration, business management and commerce. Marketing is usually conducted by the seller, typically a retailer or ma ...

negotiation Negotiation is a dialogue between two or more parties to resolve points of difference, gain an advantage for an individual or Collective bargaining, collective, or craft outcomes to satisfy various interests. The parties aspire to agree on m ...

management Management (or managing) is the administration of organizations, whether businesses, nonprofit organizations, or a Government agency, government bodies through business administration, Nonprofit studies, nonprofit management, or the political s ...

environmental remediation Environmental remediation is the cleanup of hazardous substances dealing with the removal, treatment and containment of pollution or contaminants from Natural environment, environmental media such as soil, groundwater, sediment. Remediation may be ...

health care Health care, or healthcare, is the improvement or maintenance of health via the preventive healthcare, prevention, diagnosis, therapy, treatment, wikt:amelioration, amelioration or cure of disease, illness, injury, and other disability, physic ...

research Research is creative and systematic work undertaken to increase the stock of knowledge. It involves the collection, organization, and analysis of evidence to increase understanding of a topic, characterized by a particular attentiveness to ...

energy Energy () is the physical quantity, quantitative physical property, property that is transferred to a physical body, body or to a physical system, recognizable in the performance of Work (thermodynamics), work and in the form of heat and l ...

exploration Exploration is the process of exploring, an activity which has some Expectation (epistemic), expectation of Discovery (observation), discovery. Organised exploration is largely a human activity, but exploratory activity is common to most organis ...

litigation A lawsuit is a proceeding by one or more parties (the plaintiff or claimant) against one or more parties (the defendant) in a civil court of law. The archaic term "suit in law" is found in only a small number of laws still in effect today. ...

and

dispute resolution Dispute resolution or dispute settlement is the process of resolving disputes between parties. The term ''dispute resolution'' is '' conflict resolution'' through legal means. Prominent venues for dispute settlement in international law incl ...

, etc. An important early application was a study of the pros and cons of hurricane seeding, undertaken by the Stanford Research Institute in the early 1970s for the Environmental Science Services Administration (a predecessor of the

National Oceanic and Atmospheric Administration The National Oceanic and Atmospheric Administration (NOAA ) is an American scientific and regulatory agency charged with Weather forecasting, forecasting weather, monitoring oceanic and atmospheric conditions, Hydrography, charting the seas, ...

). Decision analysis is today used by major corporations to make multibillion-dollar capital investments. For example, 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." It can also be used to make complex personal decisions, such as planning for retirement, deciding when to have a child, planning a major vacation, or choosing among several possible medical treatments. *Energy. Decision analysis has been used to structure the energy objectives for Germany. *

Entrepreneurship Entrepreneurship is the creation or extraction of economic value in ways that generally entail beyond the minimal amount of risk (assumed by a traditional business), and potentially involving values besides simply economic ones. An entrepreneu ...

. The concept of certainty equivalents from decision analysis was used to design novel and highly efficient mechanisms for funding of new businesses that are desirable to both backers and entrepreneurs. *Health Care. Decision analysis has been applied to medical decision making regarding

breast cancer Breast cancer is a cancer that develops from breast tissue. Signs of breast cancer may include a Breast lump, lump in the breast, a change in breast shape, dimpling of the skin, Milk-rejection sign, milk rejection, fluid coming from the nipp ...

diagnosis Diagnosis (: diagnoses) is the identification of the nature and cause of a certain phenomenon. Diagnosis is used in a lot of different academic discipline, disciplines, with variations in the use of logic, analytics, and experience, to determine " ...

and

therapy A therapy or medical treatment is the attempted remediation of a health problem, usually following a medical diagnosis. Both words, ''treatment'' and ''therapy'', are often abbreviated tx, Tx, or Tx. As a rule, each therapy has indications a ...

, treatment of

thyroid cancer Thyroid cancer is cancer that develops from the tissues of the thyroid gland. It is a disease in which cells grow abnormally and have the potential to spread to other parts of the body. Symptoms can include swelling or a lump in the neck, ...

, and lung cancer. *

Insurance Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to protect ...

. Decision analysts have explored the use of insurance as a mechanism to encourage adoption of beneficial health behaviors. The method has also been applied to determine optimal strategies for purchase of

long-term care insurance Long-term care insurance (LTC or LTCI) is an insurance product, sold in the United States, United Kingdom, Canada and Germany that helps pay for the costs associated with long-term care. Long-term care insurance covers care generally not covere ...

as a function of age, wealth, and risk tolerance. *Litigation. Attorneys have used decision analysis to identify strategies likely to lead to beneficial outcomes in litigation. * Portfolio Management. Decision analysis has been recommended as a method of improving resource allocations in portfolio management. *Military Planning. Decision analysis has been applied to the problem of base closure. * Radioactive Waste. Decision analysis has been used to evaluate alternatives for radioactive-waste repositories in both the United States and the United Kingdom. At a smaller scale, it has also been used to evaluate options for dealing with surplus weapons-grade plutonium. * Research and Development. Decision analysis has been used to recommend portfolios of projects to fund in research and development. *

Terrorism Terrorism, in its broadest sense, is the use of violence against non-combatants to achieve political or ideological aims. The term is used in this regard primarily to refer to intentional violence during peacetime or in the context of war aga ...

and Homeland Security. Decision analysis has been used to represent the values of both terrorists and defenders to support homeland-security decision making.Keeney, R. L., & D. von Winterfeldt (2011) A value model for evaluating homeland security decisions. Risk Analysis, 31, 1470–1487.

Software

Decision-making software Decision-making software (DM software) is software for computer applications that help individuals and organisations make choices and take decisions, typically by ranking, prioritizing or choosing from a number of options. An early example of DM s ...

packages are available for implementing decision analysis. Some particularly notable packages include Analytica for influence diagrams, and DecideIT and Logical Decisions for multi-attribute decision making.

References

External links

Society of Decision Professionals
the professional society supporting decision professionals as the advisors of choice when facing important, complex decisions.
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 The Institute for Operations Research and the Management Sciences (INFORMS) is an international society for practitioners in the fields of operations research Operations research () (U.S. Air Force Specialty Code: Operations Analysis), often s ...

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, has merged with and become the annual conference of the Society of Decision Professionals. Formed as an informal group of DA practitioners, DAAG was started in 1995 by Tom Spradlin, John Palmer, and David Skinner.
Decision Analysis Glossary
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