dqpr

10 Jul dqpr

In this post, I discuss decision theory in the context of public administration. Doing so, I draw on examples from the Department of Defense (DoD), where I was involved in several long and detailed economic evaluations of alternatives (EEoAs) and related studies. These activities commonly leveraged decision theory to advocate potential financial and acquisition decisions. Regarding maximax, maximin, or minimax decision approaches, the EEoA leverages them for optimistic, pessimistic, and most likely budget predictions, respectively.

Decision theory

I was first introduced to statistical decision theory in the Air Force. According to Lind, Marchal, and Wathan (2009), decision theory focuses on making decisions, including the payoffs that are likely to result (p. 20-2). As an acquisition professional, I participated and led several analyses of alternatives (AoAs) for program start-ups. The EEoA essentially embeds an explicit affordability assessment into an AoA. Affordability assessments should provide details about how excess funding demands will be accommodated by reductions in other mission areas, or in other accounts. This is an opportunity cost approach that leverages statistical analysis concepts (Melese, 2009, pp. 9–10), such as maximax, maximin, and minimax decision approaches.

The three components decisions include the choices available, the states of nature, and the payoffs. According to Lind, Marchal, and Wathan (2009), the available choices are known as alternatives, or acts. The states of nature are those aspects that are not under the control of the decision maker, including unforeseeable future events. The payoffs are estimated, comparing each combination of decision alternatives versus unforeseen events (p. 20-2). Thus, we are forced to statistically estimate the nature of future events, even when they are unforeseen.

Maximax is the optimistic method of choosing an alternative having the best estimated payoff. Maximin is the conservative, or pessimistic method of choosing an alternative with the best of the worst payoff. Minimax regret is the most realistic method of choosing an alternative, reflecting the minimum of all maximum regrets across all alternatives (Emmanuel, 2015).

Decision Maps

When advocating alternatives and options, we often used decision maps to guide the decision-makers. Melese (2009) discusses the EEoA as the best acquisition method of structuring a cost-effective analysis to improve defense acquisition outcomes. The EEoA decision map uses a combination of a standard flowchart and the decision tree in (Lind, Marchal, and Wathan, 2009, p. 20-10).

Conclusion

I discussed decision theory in the context of the DoD, where I was involved in the AoA and EEoA process for several different programs. These activities commonly leveraged maximax, maximin, and minimax decision approaches for optimistic, pessimistic, and most likely budget predictions, respectively. Thus, in my case, I learned these methods on the job long before academically. This is very refreshing to me.

References

Emmanuel, J. (2015, May 11). Decision Analysis 1: Maximax, Maximin, Minimax Regret [Video file]. Retrieved from https://youtu.be/NQ-mYn9fPag

Lind, D. A., Marchal, W. G., & Wathan, S. A. (2009). An introduction to decision theory. In: Statistical techniques in business and economics (14th ed.). Columbus, OH: McGraw-Hill/Irwin.

Melese, F. (2009). The Economic Evaluation of Alternatives (EEoA): Rethinking the Application of Cost-effectiveness Analysis, Multi-criteria Decision-making (MCDM) and the Analysis of Alternatives (AoA) in Defense Procurement (No. NPS-AM-09-012). NAVAL POSTGRADUATE SCHOOL MONTEREY CA GRADUATE SCHOOL OF BUSINESS AND PUBLIC POLICY.

DQ 2

Decision theory is “concerned with determining which decisions from a set of possible alternatives is optimal for a particular set of conditions” (Lind, Marchal, Wathen, 2009, 20-2). The decision-maker chooses the course of action based on certain criteria that is determined by the particular circumstances (Lind, et al., 2009).

The three approaches to decision-making are as follows:

Maximax (Optimistic) – where the decision-maker chooses the alternative with the best possible payoff

Maximin (Conservative of Pessimistic) – where the decision-maker chooses the alternative with the best of the worst payoff

Minimax Regret – where the decision-maker choses the alternative with the minimum of all maximum regrets (difference between the best payoff – payoff received) (Emmanuel, 2015).

The payoffs can include profits, costs, distance, time, etc. Where a decision-maker believes that the probability of a favorable outcome is higher, they will usually try and maximize returns. If they believe the probability of failure is high, the decision-maker will normally try to minimize losses.

One decision where decision theory might be used is looking at whether to outsource the delivery of public services (such as garbage collection) or have those services delivered by a government department. For this type of decision I would lean towards a maximin approach in a situation where the variables are unknown as I think it is important to minimize the potential significant losses in the long run particularly as the investment is using public dollars. While one might lean towards the best payoff for decisions where the policy decision is long term and there are unknowns when using public dollars a maximum approach may be more prudent.

What do others think? Is this is the most effective approach?

References

Emmanuel, J. (2015, May 11). Decision Analysis 1: Maximax, Maximin, Maximin Regret [Video file]. Retrieved from https://www.youtube.com/watch?v=NQ-mYn9fPag&feature=youtu.be

Lind, D.A., Marchal, W.G. & Wathen, S.A. (2009). An introduction to decision theory. In: Business and economics (14ed). Columbus, OH: McGraw-Hill/Irwin. Retrieved from http://highered.mheducation.com/sites/dl/free/0073401765/663724/Lin01765_ch20_final.pdf

DQ3

Decision making theory which is a branch of statistics is concerned with the process of decision making,and it explicitly involves the payoff that may result.it focuses on determining the best decision from the many alternatives(Lind,D.A.,Marchal,W.G.,& Wathen,S.A. 2009)

Currently i work with Ngora District Local Government.under the decentralization policy which Uganda has been implementing since 1993 to date,Ngora district has the mandate to mobilize resources,budget,monitor its implementation.(The constitution of the republic of Uganda Article 176,177,178, the local government Act of 1997 CAP 243 sections 3,30,,36,37).

during the budget conference,and district executive committee meeting for financial year 2018/2019 the district council resolved to build Hostel to one of the universities,two places were proposed and they were yet to make a decision on the location.the main objective for this undertaking is to generate revenue for a local government,to promote public private partnership,provide employment opportunities to both women and men etc.some thing which is emphasized by government through local economic development policy which was launched in 2012.

One of the places proposed for hostel is soroti university which government of Uganda is constructing and soon to be opened,another location is Kampala capital city.In situation like this where we have to make choices between building hostel in the city center and build in the up coming university in soroti yet to be opened.another decision the district is yet to make is whether to go for hostel business or not,this inevitably calls for the decision making theory to determine the best decision from the variety of choices available.(DEC minute 0125/FY 2018/2019).

the district needs more financial resources to implement its planned activities and any strategy that would help maximize gains would be first priority.in this case the maxi max strategy becomes useful.

References:

Emmanuel,J.(2015,may 11).Decision analysis1:maxi max,maxi mini,maxi max Regrets

.Retrieved from https://youtu.be/NQ-mYn9fpag

Lind,.D.A.,Marchal,W.G.,&Wathen,S.A.(2009). An introduction to decision theory.In:statistical techniques in business and economics(14th ed.).columbus,H.O:McGraw-hill/lrwin.Retrieved from http://highered.meducation.com/sites/ch20-final.pdf

Ohio university.(2014,February 21).probability and statistics

Retrieved from https://youtu.be/RRrBzAd2pxs?t=14m36s

The 1995 Constitution of the Republic of Uganda,

The Local Government Act of 1997 CAP 243