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. 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 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. 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.
The 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 by economists. Bayesian statistician Dennis Lindley even wrote a book about MEU which included the stunningly-arrogant sentence, “The main conclusion [of this book] is that there is essentially only one way to reach a decision sensibly.”
Rational? This method is not even feasible, let alone sensible or good!
First, where do all these numbers come from? With the explicit assumptions that I have listed, economists are assuming that the decision-maker has some form of perfect knowledge. Well, no one making any real-world decisions has that much knowledge. Of course, economists often respond, estimates can be used when the knowledge is missing. But whose estimates? Sourced from where? 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. Worse than that, any consensus achieved should immediately be suspected and interrogated, since it may be evidence of groupthink. 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!
Second, the MEU principle simply averages across uncertain events. What of action-options with potentially catastrophic outcomes? 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. 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.
Third, look at all the assumptions not made explicit in this framework. There is no mention of the time allowed for the decision, so apparently the decision-maker has infinities of time available. No mention is made of the processing or memory resources available for making the decision, so she has infinities of world also. That makes a change from most real-world decisions: what a pleasant utopia this MEU-land must be. 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, or the strategies of the company or the society in which the decision-maker sits. How could a decision procedure which ignores such issues be considered, even for a moment, rational? 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. 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?
And do the selected action-options just execute themselves? 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, 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.*
For 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. 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. 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. Arguably this is true of almost all significant corporate strategy decisions and major public policy decisions: 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).
Mainstream economists have a long way to go before they will have a theory of good decision-making. In the meantime, it would behoove them to show some humility when criticizing the decision-making processes of human beings.**
Notes and Bibliography:
Oskar Lange [1945-46]: The scope and method of economics. The Review of Economic Studies, 13 (1): 19-32.
Dennis Lindley : Making Decisions. Second Edition. London, UK: John Wiley and Sons.
L James Savage : The Foundations of Statistics. New York, NY, USA: Wiley.
* 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.
** Three-toed sloth comments dialogically and amusingly on MEU theory here.