intermidate financial management
200
IEEE TRANSACTIONS ON SYSTEMS SCIENCE AND CY13ERNETICS, VOL.
A
Tutorial
Introduction
SSC-4,
NO.
3, SEPTEMLIER 1968
to Decision Theory
D. WARNER NORTH
Abstract-Decision theory provides a rational framework for choosing between alternative courses of action when the consequences resulting from this choice are imperfectly known. Two streams of thought serve as the foundations: utility theory and the inductive use of probability theory.
The intent of this paper is to provide a tutorial introduction to this increasingly important area of systems science. The foundations are developed on an axiomatic basis, and a simple example, the "anniversary problem," is used to illustrate decision theory. The concept of the value of information is developed and demonstrated. At times mathematical rigor has been subordinated to provide a clear and readily accessible exposition of the fundamental assumptions and concepts of decision theory. A sampling of the many elegant and rigorous treatments of decision theory is provided among the references. INTRODUCTION
THE NECESSITY of makinig decisions in the face of uncertainty is an integral part of our lives. We must act without knowing the consequeinces that will result from the action. This uncomfortable situation is particularly acute for the systems engineer or manager who must make far-reaching decisions oIn complex issues in a rapidly changing technological environment. Uncertainty appears as the dominant consideration in many systems problems as well as in decisions that we face in our personal lives.
To deal with these problems oii a rational basis, we must develop a theoretical structure for decisiotn making that includes uncertainity.
Confronting uncertainty is Inot easy-. We naturally try to avoid it; sometimes we even pretend it does not exist.
Our primitive ancestors sought to avoid it by consulting soothsayers and oracles who would "reveal" the uncertain
future.
IEEE TRANSACTIONS ON SYSTEMS SCIENCE AND CY13ERNETICS, VOL.
A
Tutorial
Introduction
SSC-4,
NO.
3, SEPTEMLIER 1968
to Decision Theory
D. WARNER NORTH
Abstract-Decision theory provides a rational framework for choosing between alternative courses of action when the consequences resulting from this choice are imperfectly known. Two streams of thought serve as the foundations: utility theory and the inductive use of probability theory.
The intent of this paper is to provide a tutorial introduction to this increasingly important area of systems science. The foundations are developed on an axiomatic basis, and a simple example, the "anniversary problem," is used to illustrate decision theory. The concept of the value of information is developed and demonstrated. At times mathematical rigor has been subordinated to provide a clear and readily accessible exposition of the fundamental assumptions and concepts of decision theory. A sampling of the many elegant and rigorous treatments of decision theory is provided among the references. INTRODUCTION
THE NECESSITY of makinig decisions in the face of uncertainty is an integral part of our lives. We must act without knowing the consequeinces that will result from the action. This uncomfortable situation is particularly acute for the systems engineer or manager who must make far-reaching decisions oIn complex issues in a rapidly changing technological environment. Uncertainty appears as the dominant consideration in many systems problems as well as in decisions that we face in our personal lives.
To deal with these problems oii a rational basis, we must develop a theoretical structure for decisiotn making that includes uncertainity.
Confronting uncertainty is Inot easy-. We naturally try to avoid it; sometimes we even pretend it does not exist.
Our primitive ancestors sought to avoid it by consulting soothsayers and oracles who would "reveal" the uncertain
future.