Decision-making under uncertainty

Since decision-making is influenced by both beliefs and desires it is a more complex process than simply judging probabilities, and involves how these beliefs and preferences interact with judgements about different probabilities of prospective outcomes – for example, whether an actor decides to take an umbrella concerns not only on what the probability is of rain, but also whether the person thinks it important to protect themselves from getting wet.

There are decisions which do not depend upon judgements about probability – it is merely a matter of choosing the more clearly favourable alternative. However, many more decisions do involve comparisons of probabilities: there are decisions under risk in which the probabilities of different outcomes are known though the outcome in the individual case may not be clear until the event of interest happens, and there are decisions under uncertainty in which the probabilities of the different outcomes are unknown or the probabilities are largely unclear. Decision-making in an uncertain situation is therefore more complicated than a decision under risk because of this character of being “an unknown quantity”.

If one had only one option or course-of-action open, rather than a set of choices, there would be no uncertainty in the situation and no decision would be required to be taken. Similarly, if there was nothing ‘riding’ upon the outcome or we cared little about one outcome as against another, the decision would provoke little anxiety. Because decision-makers desire favourable outcomes from the decision situations they face (or at the very least do not wish to bring about disaster) and especially because in an uncertain situation it is not immediately clear which alternative is the best course-of-action, such decisions necessarily involve some level of anxiety. For example, the situation with a student considering his or her options after college: attending a graduate school, securing immediate employment to ease their debt burden, travelling abroad, and so forth – typically it is not clear beforehand which is the better option or whether there is another, superior, alternative which has not even been considered. Such uncertainty is present in many decision-making situations. Other uncertain events are the outcome of an election, the conviction or acquittal of a defendant, or the future value of a currency, commodity, or a stock index. The recent sub-prime and credit default insurance swaps-initiated “credit crunch” and financial turmoil, and resultant questions of credibility and “crisis of confidence” on world markets are an evolving example of decision-making under uncertainty involving human systems.

Systematic biases have been detected in people’s decision-making under uncertainty, for example, in their neglect of probability and statistical reasoning or in the effects of framing on actors’ reactions to decision problems, see: Prospect theory and heuristics (judgemental).

People’s general tendency is to try to reduce uncertainty – taking a decision may seem to ‘resolve’ the uncertainty.

The decision-making process is made up of, in brief:

At any point in the decision process the decision-maker may seek to obtain better or further information in an effort to make a more effective decision, and having made a decision provisionally they may review whether the decision made adequately resolves the problem: upon reflection they may re-initiate the process in an attempt to improve the decision.

Some studying decision-making view the decision-maker as an hypothesis-tester evaluating decision options.

(see also: belief and bias, decision-making, Decision analysis, judgement, decision, heuristics (judgemental), counterfactual reasoning, attitude)