Topic 1 Summary: Introduction to

normative and descriptive decision

making
 Defining a decision

Though decision making is frequently undertaken in our professional and personal life, it is very
difficult to provide a generally acceptable definition of this activity. For the sake of clarity, we will
adopt the following as our working definition:

“A decision is a commitment to a course of action that is intended to produce a satisfying state of

affairs” (Yates, Veinott and Patalano, 2003, p. 24).

To elaborate, a decision:

o Involves a choice between options or actions which may include inaction.

o Is goal oriented; the action is taken so as to produce favourable outcomes.
o Usually involves evaluation of options or outcomes, ie a judgment distinguishing between
different features or options.

In your reading, you may find the terms decision making and judgment used together, or
interchangeably. From our perspective, a judgment is one component of decision making, and can be
described as:

“Entailing the rendering of an opinion about a state of affairs or future condition” (Yates,
Veinott and Patalano, 2003, p. 26).

You may make a judgment without making a decision based on that judgment, and it is possible
(though not advisable) to make a decision without forming a judgment of the options or choices.

In other words, a decision is a conscious act, which puts us (or another) into a better position than
previously.

Distinction between decision process and decision outcome

Within decision making there is a distinction between the decision process (the information used, and
the cognitive actions adopted to process and compute the information) and the decision outcome (the
results of the decision process).

Often, when people want to improve their decision making, the focus is on the decision outcome. This
can result in the decision process being overlooked or understated. If the aim is to improve the
decision outcomes, the only way to do this is to focus on improving the decision processes. We will
return to this argument throughout the module.

Typologies of decision

Many writers have argued that we can distinguish between different types of decision. Common
typologies include:

o Strategic decisions: involve the general direction taken by an individual or organisation.

They often determine subsequent decisions, take some time to make and involve outcomes
that may have long-term repercussions.
o Tactical decisions: involve the implementation of strategy and represent the stream of
smaller-scale decisions that usually take a shorter time to make and are associated with
outcomes that occur in the shorter term.
o Operational decisions: involve the day-to-day decision making needed to execute plans and
tactics. In organisations, senior managers tend to make the strategic decisions and more junior
managers the tactical and operational decisions.

Structured and unstructured decisions

o Unstructured decisions: These occur when there is a general understanding of the need to
act. In these situations, however, there is no clear idea about the relevant goals and objectives,
the alternative actions that are available or how these alternatives should be evaluated. An
example of an unstructured decision could be crisis management in the aftermath of a natural
disaster, which requires immediate responses and a series of decisions, despite objectives and
processes to achieve these lacking clarity, at least initially.
o Structured decisions: involve clear objectives, a clearly defined choice set and clarity on
how the alternatives are evaluated. For example, the choice between competitive tenders, with
clear criteria and objectives, is a structured decision.

Riskless and risky decisions

o Riskless decisions: involve choices between outcomes which are known with certainty. For
example, if you choose to buy an expensive machine that does everything rather than the
economy version which does most of what you need you know what you are getting. This is a
riskless situation, there is little, if any, uncertainty. At the heart of riskless decisions is often a
trade-off between cost and value. A focus on attaining the best value means you may not
necessarily choose the best option, but the one that is best value for money.
o
o Risky decisions: occur when one of several states could follow the choice made and you
cannot determine the end state at the point a choice is made. For example, the outcome of
different investment plans cannot be pre-determined since they depend on future events which
may not be controlled by the decision maker (eg the state of the economy). At the heart of this
type of problem is an assessment of the risks (or likelihood of events occurring), and trading
these off against the attractiveness of the outcomes.
 Note that the theories that describe and explain what happens when people make decisions, and the
interventions devised to improve these decisions are likely to differ for different types of decisions. As
such, it is important to be able to characterise a decision problem along these dimensions. In doing so,
the most appropriate approaches and interventions can be selected.

How good is your decision making?

The ability to reflect on your decision making is a vital step in improving decision making abilities.
You have to know what evidence or information is relevant to decisions and how to evaluate that
information to reach a decision. In particular, you need to know how much weight (importance) to
give each element of information as evidence. The ability to do this varies across individuals.

o see the results of your cohort's responses to the question "how good your decision making
compared to the rest of the cohort?"

It may indeed be that everyone in the cohort is a better than average decision-maker in comparison to
the general population, but the question was asked in comparison to the rest of your cohort. Within
a given group, when all members are included, there has to be an equivalent number of people above
and below average, known as a normal distribution.

Typical aggregated responses illustrate a number of things, including:

o People tend to be overconfident in their own abilities…and/or

o People misunderstand/misinterpret the decisions or judgments they are required to make.

Both of these issues can contribute to poorer quality decision making. This module will elaborate on
both of these problems, and some ways to overcome them by considering the cognitive mechanisms
which underlie these common errors of judgement.

 Introducing normative decision making

Normative (rational) decision making is a formal process of systematically analysing options, as

opposed to using judgments which rely on personal intuition. Normative models prescribe that, to be
rational, people must seek to maximise their outcomes (utility) in the way that economic theories do.

The assumptions of normative (rational) decision making

The normative (rational) model of decision making makes some important assumptions about the
decision maker. These assumptions include:

o The decision maker has full, accurate and objective information about alternatives.
o The decision maker has the time, cognitive ability and resources to evaluate each choice fully.
 o The decision maker’s objective is to maximise their personal outcomes.

Normative (rational) axioms

In addition to the assumptions above about the decision makers and their motivation, normative
(rational) models of decision making require decision makers to follow a set of axioms (rules) if the
decision process adopted is to be deemed rational. Some examples of such axioms include:

Decidability (or completeness): The decision maker must be able to decide between options. For
example for a choice set with two options, either:

o Option 1 is preferred to Option 2.

o Option 2 is preferred to Option 1.
o Option 1 and Option 2 are liked equally.

Transitivity: The decision maker should hold preferences for options that are consistent relative to
other options. For example:

o If Option 1 is preferred to Option 2, and Option 2 is preferred to Option 3, then it is

reasonable to state that Option 1 is preferred to Option 3.

Invariance: The underlying structure of a problem is the vital element to base decisions on, and the
surface structure should not influence the decision maker’s choices. For example: The same question,
asked in different ways should yield the same answer: the number of people choosing an option that is
described as 97% fat free should be the same as the number choosing it when described as 3% fat.

Independence of utility and probability: How important an event is to you, should not influence
your judgement of how likely it is to occur. For example, you may really want your sports team to win
a particular match, but really wanting it to happen should not influence your rational judgement of
how likely it is to occur.

All the axioms are deceptively simple and reasonable, and most people accept them when they are
presented with them in a straightforward way, as in the above examples.

The strength of the normative (rational) decision

There is mathematical evidence which shows that through accepting and adhering to these axioms and
assumptions, it is possible to identify the rational or best course of action for that individual in that
situation. That is, the decision maker will make choices that maximise their benefits and minimise
their costs. This is usually referred to as maximising expected utility.
 You will explore this further shortly and consider ways in which you could structure decisions in a
way that makes this possible. More importantly, however, you will address the critical question of
whether this is actually the way we make decisions, when we are left to our own devices.

 One normative (rational) approach to decision making is Decision Theory. Decision Theory allows
you to make rational decisions by calculating and comparing subjective expected utilities (SEU)
which denote the attractiveness of an outcome(s) associated with a given option. The rational decision
maker should chose the option which offers the greatest subjective expected utility (SEU).

The following film demonstrates how a rational decision maker could structure a decision problem
and calculate the relevant SEUs in order to choose the rational option.

Structuring a decision.pdf

A summary of the process, including the calculation of SEU is provided here. You may wish to refer
back to this later when you consider how people really do make decisions, and the extent to which
they are rational.
 There is a mistake in the above diagram (which I have been unable to fix). See if you can spot it, and
then post your answer on the discussion board for this topic. (NJB)

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