Decision analysis

Decision analysis (DA) is the discipline comprising the philosophy,

methodology, and professional practice necessary to address important
decisions in a formal manner. Decision analysis includes many procedures,
methods, and tools for identifying, clearly representing, and formally assessing
important aspects of a decision; for prescribing a recommended course of
action by applying the maximum expected-utility axiom to a well-formed
representation of the decision; and for translating the formal representation of a
decision and its corresponding recommendation into insight for the decision
maker, and other corporate and non-corporate stakeholders.

History

In 1931, mathematical philosopher Frank Ramsey pioneered the idea of

subjective probability as a representation of an individual’s beliefs or
uncertainties. Then, in the 1940s, mathematician John von Neumann and
economist Oskar Morgenstern developed an axiomatic basis for utility theory as
a way of expressing an individual’s preferences over uncertain outcomes. (This
is in contrast to social-choice theory, which addresses the problem of deriving
group preferences from individual preferences.) Statistician Leonard Jimmie
Savage then developed an alternate axiomatic framework for decision analysis
in the early 1950s. The resulting expected-utility theory provides a complete
axiomatic basis for decision making under uncertainty.

Once these basic theoretical developments had been established, the methods
of decision analysis were then further codified and popularized, becoming
widely taught (e.g., in business schools and departments of industrial
engineering). A brief and highly accessible introductory text was published in
1968 by decision theorist Howard Raiffa of the Harvard Business School.[1]
Subsequently, in 1976, Ralph Keeney and Howard Raiffa extended the basics of
utility theory to provide a comprehensive methodology for handling decisions
involving trade-offs between multiple objectives.[2] Engineering professor Ron
Howard of Stanford University and decision analyst Jim Matheson then
published, in 1977, a set of readings on decision analysis;[3] this was expanded
into a two-volume set in 1984.[4] Subsequent textbooks and additional
developments are documented below under Further reading.

Although decision analysis is inherently interdisciplinary (involving contributions

from mathematicians, philosophers, economists, statisticians, and cognitive
psychologists), it has historically been considered a branch of operations
research. In 1980, the Decision Analysis Society was formed as a special
interest group within Operations Research Society of America (ORSA), which
later merged with The Institute of Management Sciences (TIMS) to become the
Institute for Operations Research and the Management Sciences (INFORMS).
Beginning in 2004, INFORMS has published a dedicated journal for these topics,
Decision Analysis.

Following along with these academic developments, decision analysis has also
evolved into a mature professional discipline.[5] The method has been used to
support business and public-policy decision-making since the late 1950s;
applications from 1990-2001 were reviewed in the inaugural issue of Decision
Analysis.[6] Decision analysis has been especially widely adopted in the
pharmaceutical industry and the oil and gas industry, since both industries
regularly need to make large high-risk decisions (e.g., about investing in
development of a new drug or making a major acquisition).[7]

Methodology

Framing is the front end of decision analysis, which focuses on developing an

opportunity statement (what and why), boundary conditions, success measures,
a decision hierarchy, strategy table, and action items. It is sometimes believed
that the application of decision analysis always requires the use of quantitative
methods. In reality, however, many decisions can be made using qualitative
tools that are part of the decision-analysis toolbox, such as value-focused
thinking,[8] without the need for quantitative methods.
The framing process may lead to the development of an influence diagram or
decision tree. These are commonly used graphical representations of decision-
analysis problems. These graphical tools are used to represent the alternatives
available to the decision maker, the uncertainties they involve, and how well the
decision maker's objectives would be achieved by various final outcomes. They
can also form the basis of a quantitative model when needed. For example,
quantitative methods of conducting Bayesian inference and identifying optimal
decisions using influence diagrams were developed in the 1980s,[9][10] and are
now incorporated in software.

In a quantitative decision-analysis model, uncertainties are represented through

probabilities -- specifically, subjective probabilities. The decision maker's
attitude to risk is represented by utility functions, and the attitude to trade-offs
between conflicting objectives can be expressed using multi-attribute value
functions or multi-attribute utility functions (if there is risk involved). (In some
cases, utility functions can be replaced by the probability of achieving an
uncertain aspiration level or "target".)[11][12] Based on the axioms of decision
analysis, the best decision to choose is the one whose consequences have the
maximum expected utility (or that maximizes the probability of achieving the
uncertain aspiration level).

It is sometimes assumed that quantitative decision analysis can be applied only

to factors that lend themselves easily to measurement (e.g., in natural units
such as dollars). However, quantitative decision analysis and related methods,
such as applied information economics, can also be applied even to seemingly
intangible factors.

Decision analysis as a prescriptive approach

Prescriptive decision-making research focuses on how to make "optimal"

decisions (based on the axioms of rationality), while descriptive decision-
making research aims to explain how people actually make decisions
(regardless of whether their decisions are "good" or optimal). Unsurprisingly,
therefore, there are numerous situations in which decisions made by individuals
depart markedly from the decisions that would be recommended by decision
analysis.

Some have criticized formal methods of decision analysis for allowing decision
makers to avoid taking responsibility for their own decisions, and instead
recommend reliance on intuition or "gut feelings".[13] Moreover, for decisions
that must be made under significant time pressure, it is not surprising that
formal methods of decision analysis are of little use, with intuition and expertise
becoming more important.[14] However, when time permits, studies have
demonstrated that quantitative algorithms for decision making can yield results
that are superior to "unaided intuition".[15] In addition, despite the known biases
in the types of human judgments required for decision analysis, research has
shown at least a modest benefit of training and feedback in reducing bias.[16]

Critics cite the phenomenon of paralysis by analysis as one possible

consequence of over-reliance on decision analysis in organizations (the
expense of decision analysis is in itself a factor in the analysis). However,
strategies are available to reduce such risk.[17]

There is currently a great deal of interest in quantitative methods for decision

making. However, many such methods depart from the axioms of decision
analysis, and can therefore generate misleading recommendations under some
circumstances, so are not truly prescriptive methods. Some of the most popular
of such non-decision-analytic methods include fuzzy-set theory for the
representation of uncertainties, and the analytic-hierarchy process for the
representation of preferences or value judgments. While there may occasionally
be justification for such methods in applications (e.g., based on ease of use),
decision analysts would argue for multi-attribute utility theory as the gold
standard to which other methods should be compared, based on its rigorous
axiomatic basis.

Although decision analysis has been frequently used in support of government

decision making, it is important to note that the basic theory applies only to
individual decision makers. There is unfortunately no axiomatic prescriptive
theory comparable to decision analysis that is specifically designed for group or
public-policy decisions. For more on this topic, see group decision-making for
discussions of the behavioral issues involved in group decisions, and social
choice theory for theoretical considerations that can affect group decisions.

Applications

Decision-analytic methods have been used in a wide variety of fields, including

business (planning, marketing, negotiation), management, environmental
remediation, health care, research, energy, exploration, litigation and dispute
resolution, etc. An important early application was a study of the pros and cons
of hurricane seeding, undertaken by the Stanford Research Institute in the early
1970s for the Environmental Science Services Administration (a predecessor of
the National Oceanic and Atmospheric Administration).[18]

Decision analysis is today used by major corporations to make multibillion-

dollar capital investments. For example, In 2010, Chevron won the Decision
Analysis Society Practice Award for its use of decision analysis in all major
decisions.[19] In a video detailing Chevron's use of decision analysis, Chevron
Vice Chairman George Kirkland notes that "decision analysis is a part of how
Chevron does business for a simple, but powerful, reason: it works."[20] It can
also be used to make complex personal decisions, such as planning for
retirement, deciding when to have a child,[21] planning a major vacation, or
choosing among several possible medical treatments.
Energy. Decision analysis has been used to structure the energy objectives for Germany.[22][23]
Entrepreneurship. The concept of certainty equivalents from decision analysis was used to design
novel and highly efficient mechanisms for funding of new businesses that are desirable to both
backers and entrepreneurs.[24]
Health Care. Decision analysis has been applied to medical decision making regarding breast
cancer diagnosis[25] and therapy,[26] treatment of thyroid cancer,[27] and lung cancer.[28]
Insurance. Decision analysts have explored the use of insurance as a mechanism to encourage
adoption of beneficial health behaviors.[29] The method has also been applied to determine
optimal strategies for purchase of long-term care insurance as a function of age, wealth, and risk
tolerance.[30]
 Litigation. Attorneys have used decision analysis to identify strategies likely to lead to beneficial
outcomes in litigation.[31]
Portfolio Management. Decision analysis has been recommended as a method of improving
resource allocations in portfolio management.[7][32]
Military Planning. Decision analysis has been applied to the problem of base closure.[33]
Radioactive Waste. Decision analysis has been used to evaluate alternatives for radioactive-waste
repositories in both the United States and the United Kingdom.[34][35] At a smaller scale, it has also
been used to evaluate options for dealing with surplus weapons-grade plutonium.[36][37]
Research and Development. Decision analysis has been used to recommend portfolios of
projects to fund in research and development.[38]
Terrorism and Homeland Security. Decision analysis has been used to represent the values of
both terrorists and defenders to support homeland-security decision making.[39][40]

Software

Decision-making software packages are available for implementing decision

analysis. Some particularly notable packages include Analytica for influence
diagrams, and DecideIT and Logical Decisions for multi-attribute decision
making.

See also

Choice

Decision analysis cycle

Decision conferencing

Decision engineering

Decision making software

Decision model

Decision quality

Decision support

Decision theory

Influence diagram

Management science

Micromort
 Multiple-criteria decision analysis (MCDA)

Optimal decision

Stochastic dominance

Value tree analysis

References

1. Raiffa, H. (1968). Decision Analysis: Introductory Lectures on Choices Under Uncertainty.

Reading, MA: Addison-Wesley.

2. Keeney, R. & Raiffa, H. (1976). Decisions with Multiple Objectives: Preferences and Value
Tradeoffs. New York: Wiley.

3. Howard, R.A. & Matheson, J.E. (1977). Readings in Decision Analysis. Menlo Park, CA: SRI
International.

4. Howard, R.A. & Matheson, J.E. (1984). Readings on the Principles and Applications of Decision
Analysis. Menlo Park, CA: Strategic Decisions Group.

5. Ulvila, J.W.; Brown, R.V. (1982). "Decision Analysis Comes of Age". Harvard Business Review. 60
(5): 130–141. PMID 10257404 (https://pubmed.ncbi.nlm.nih.gov/10257404) .

6. Keefer, D.L.; Kirkwood, C.W.; Corner, J.L. (2004). "Perspective on Decision Analysis Applications,
1990–2001". Decision Analysis. 1 (1): 5–38. doi:10.1287/deca.1.1.5.17844 (https://doi.org/10.
1287%2Fdeca.1.1.5.17844) (inactive 26 January 2025).

7. Sharpe, P.; Keelin, T. (1998). "How SmithKline Beecham Makes Better Resource-Allocation
Decisions". Harvard Business Review. 76 (2): 3–10. PMID 10177866 (https://pubmed.ncbi.nlm.
nih.gov/10177866) .

8. Keeney R (2002). Value Focused Thinking: A Path to Creative Decisionmaking. Harvard University
Press. ISBN 0-674-93197-1.

9. Shachter, R.D. (November–December 1986). "Evaluating influence diagrams" (http://or.journal.i

nforms.org/content/34/6/871.full.pdf+html) (PDF). Operations Research. 34 (6): 871–882.
doi:10.1287/opre.34.6.871 (https://doi.org/10.1287%2Fopre.34.6.871) .

10. Shachter, R.D. (July–August 1988). "Probabilistic inference and influence diagrams" (http://or.j
ournal.informs.org/content/36/4/589.full.pdf+html) (PDF). Operations Research. 36 (4):
589–604. doi:10.1287/opre.36.4.589 (https://doi.org/10.1287%2Fopre.36.4.589) .
hdl:10338.dmlcz/135724 (https://hdl.handle.net/10338.dmlcz%2F135724) .
11. Bordley, R.; LiCalzi, M. (2000). "Decision Analysis Using Targets Instead of Utility Functions".
Decisions in Economics and Finance. 23 (1): 53–74. doi:10.1007/s102030050005 (https://doi.o
rg/10.1007%2Fs102030050005) . hdl:10278/3610 (https://hdl.handle.net/10278%2F3610) .
S2CID 11162758 (https://api.semanticscholar.org/CorpusID:11162758) .

12. Bordley, R.; Kirkwood, C. (2004). "Multiattribute preference analysis with Performance Targets".
Operations Research. 52 (6): 823–835. doi:10.1287/opre.1030.0093 (https://doi.org/10.1287%
2Fopre.1030.0093) .

13. Klein G (2003). The Power of Intuition. New York: Doubleday. ISBN 0-385-50289-3.

14. Klein G (1999). Sources of Power. Boston, MA: MIT Press. ISBN 0-262-11227-2.

15. Robyn M. Dawes & Bernard Corrigan (1974). "Linear Models in Decision Making". Psychological
Bulletin. 81 (2): 93–106. doi:10.1037/h0037613 (https://doi.org/10.1037%2Fh0037613) .

16. B. Fischhoff; L. D. Phillips & S. Lichtenstein (1982). "Calibration of Probabilities: The State of
the Art to 1980". In D. Kahneman & A. Tversky (eds.). Judgement under Uncertainty: Heuristics
and Biases. Cambridge University Press.

17. Kane, Becky (8 July 2015). "The Science of Analysis Paralysis: How Overthinking Kills Your
Productivity & What You Can Do About It" (https://blog.todoist.com/2015/07/08/analysis-paral
ysis-and-your-productivity/) . Todoist Blog. Retrieved 14 May 2016.

18. Sundqvist, H.; Howard, R.A.; Matheson, J.E.; North, D.W. (1973). "Hurricane Seeding Analysis".
Science. 181 (4104): 1072–1073. Bibcode:1973Sci...181.1072S (https://ui.adsabs.harvard.ed
u/abs/1973Sci...181.1072S) . doi:10.1126/science.181.4104.1072 (https://doi.org/10.1126%
2Fscience.181.4104.1072) . PMID 17731270 (https://pubmed.ncbi.nlm.nih.gov/17731270) .
S2CID 34907224 (https://api.semanticscholar.org/CorpusID:34907224) .

19. "DAS Practice Award" (https://web.archive.org/web/20160913132443/https://www.informs.or

g/Recognize-Excellence/Community-Prizes-and-Awards/Decision-Analysis-Society/DAS-Practi
ce-Award) . INFORMS. 15 May 2016. Archived from the original (https://www.informs.org/Rec
ognize-Excellence/Community-Prizes-and-Awards/Decision-Analysis-Society/DAS-Practice-Aw
ard) on 13 September 2016.

20. "How Chevron Makes Decisions" (https://www.youtube.com/watch?v=JRCxZA6ay3M) .

YouTube. Chevron. 1 December 2010. Retrieved 23 March 2019.

21. Keeney, R. L., D. A. Vernik (2007) Analysis of the biological clock decision. Decision Analysis, 4,
114–135

22. Keeney, R. L., O. Renn, & D. von Winteffeldt (1987). Structuring West Germany's energy
objectives, Energy Policy 15 (4): 352-362.

23. Höfer, T., R. von Nitzsch, R. Madlener (2020). Using value-focused thinking and multicriteria
decision making to evaluate energy transition alternatives. Decision Analysis, 17, 330-355.
24. Bodily, S. E. (2016) Reducing risk and improving incentives in funding entrepreneurs. Decision
Analysis, 13, 101–116.

25. Alagoz, O., J. Chhatwal, E. S. Burnside (2013) Optimal policies for reducing unnecessary follow-
up mammography exams in breast cancer diagnosis. Decision Analysis, 10, 200–224.

26. Nohdurft, E., E. Long, S. Spinler (2017) Was Angelina Jolie right? Optimizing cancer prevention
strategies among BRCA mutation carriers. Decision Analysis, 14, 139–169.

27. Esnaola, N. F., S. B. Cantor, S. I. Sherman, J. E. Lee, D. B. Evans (2001) Optimal treatment
strategy in patients with papillary thyroid cancer: a decision analysis. Surgery, 130, 921–930.

28. Lee, J. J., B. N. Bekele, X. Zhou, S. B. Cantor, R. Komaki, J. S. Lee (2006) Decision analysis for
prophylactic cranial irradiation for patients with small-cell lung cancer. Journal of Clinical
Oncology, 24, 3597-3603.

29. Meeker, D., C. Thompson, G. Strylewicz, T. K. Knight, J. N. Doctor (2015) Use of insurance
against a small loss as an incentive strategy. Decision Analysis, 12, 122–129.

30. Bodily, S. E., B. Furman (2016) Long-term care insurance decisions. Decision Analysis, 13, 173–
191.

31. Celona, J.N. (2016) Winning at Litigation through Decision Analysis. Springer, New York.

32. Salo, A., J. Keisler, A. Morton (2011) Portfolio decision analysis: Improved methods for
resource allocation, Springer, New York.

33. Ewing, P. L., W. Tarantino, G.S. Parnell (2006) Use of decision analysis in the army base
realignment and closure (BRAC) 2005 military value analysis. Decision Analysis, 3, 33-49.

34. Merkhofer, M. W., & Keeney, R. L. (1987). A multiattribute utility analysis of alternative sites for
the disposal of nuclear waste. Risk Analysis, 7, 173–194.

35. Morton, A., Airoldi, M., & Phillips, L. D. (2009). Nuclear risk management on stage: A decision
analysis perspective on the UK’s Committee on Radioactive Waste Management. Risk Analysis,
29, 764–779.

36. Dyer, J. S., T. Edmunds, J. C. Butler, J. Jia (1998) A multiattribute utility analysis of alternatives
for the disposition of surplus weapons-grade plutonium. Operations Research, 46, 749–762

37. Butler, J. C., A. N. Chebeskov, J. S. Dyer, T. A. Edmunds, J. Jia, V. I. Oussanov (2005) The United
States and Russia evaluate plutonium disposition options with multiattribute utility theory.
Interfaces, 35, 88–101.

38. Kurth, M., J. M. Keisler, M. E. Bates, T. S. Bridges, J. Summers, I. Linkov (2017) A portfolio
decision analysis approach to support energy research and development resource allocation.
Energy Policy, 105, 128-135.

39. Keeney, R. L. (2007) Modeling values for anti-terrorism analysis. Risk Analysis, 27, 585–596.
40. Keeney, R. L., & D. von Winterfeldt (2011) A value model for evaluating homeland security
decisions. Risk Analysis, 31, 1470–1487.

Further reading

Alemi F, Gustafson D (2006). Decision Analysis for Healthcare Managers. Health Administration
Press. ISBN 978-1-56793-256-0.

Clemen, Robert & T. Reilly (2004). Making Hard Decisions (2nd ed.). Belmont CA: Southwestern
College Pub. ISBN 978-0-495-01508-6.

Charlesworth, David (2017). Decision Analysis for Managers: A Guide for Making Better Personal
and Business Decisions (2nd ed.). Business Expert Press. ISBN 978-1631576041.

Fineberg, Harvey V.; Weinstein, Milton C. (1980). Clinical decision analysis (https://archive.org/det
ails/clinicaldecision0000unse_e3n8) . Philadelphia: Saunders. ISBN 0-7216-9166-8.

Goodwin, P. & G. Wright (2004). Decision Analysis for Management Judgment (3rd ed.). Chichester:
Wiley. ISBN 0-470-86108-8.

Hammond, J.S.; Keeney, R.L. & Raiffa, H. (1999). Smart Choices: A Practical Guide to Making Better
Decisions (https://archive.org/details/smartchoicesprac00hamm) . Harvard Business School
Press. ISBN 0-585-31075-0.

Holtzman, Samuel (1989). Intelligent Decision Systems. Addison-Wesley. ISBN 0-201-11602-2.

Howard, R.A.; J.E. Matheson, eds. (1984). Readings on the Principles and Applications of Decision
Analysis. Menlo Park CA: Strategic Decisions Group. ISBN 0-9623074-0-8. (volume 1 (https://ww
w.gwern.net/docs/statistics/decision/1983-howard-readingsondecisionanalysis-v1.pdf) ,
volume 2 (https://www.gwern.net/docs/statistics/decision/1983-howard-readingsondecisionanal
ysis-v2.pdf) )

Keeney, R.L. (1992). Value-focused thinking—A Path to Creative Decisionmaking. Harvard University
Press. ISBN 0-674-93197-1.

Keeney, R. L. and Raiffa, H. (1976). Decisions with Multiple Objectives: Preferences and Value
Tradeoffs. Wiley, New York. Reprinted, Cambridge Univ. Press, New York (1993). ISBN
9781139174084.

Leach, Patrick (2006). Why Can't You Just Give Me the Number? An Executive's Guide to Using
Probabilistic Thinking to Manage Risk and to Make Better Decisions. Probabilistic. ISBN 0-9647938-
5-7.

Matheson, David & Matheson, Jim (1998). The Smart Organization: Creating Value through
Strategic R&D (https://archive.org/details/smartorganizatio00math) . Harvard Business School
Press. ISBN 0-87584-765-X.
 Morgan, Granger & Henrion, Max (1992). Uncertainty: A Guide to Dealing with Uncertainty in
Quantitative Risk and Policy Analysis. Cambridge University Press. ISBN 0-521-42744-4.

Pratt, John; H. Raiffa & R. Schlaifer (1995). Introduction to Statistical Decision Theory. MIT Press.
ISBN 978-0-262-16144-2.

Raiffa, Howard (1997). Decision Analysis: Introductory Readings on Choices Under Uncertainty.
McGraw Hill. ISBN 0-07-052579-X.

Shi H, Lyons-Weiler J (2007). "Clinical decision modeling system" (https://www.ncbi.nlm.nih.gov/p

mc/articles/PMC2131745) . BMC Med Inform Decis Mak. 7: 23. doi:10.1186/1472-6947-7-23 (htt
ps://doi.org/10.1186%2F1472-6947-7-23) . PMC 2131745 (https://www.ncbi.nlm.nih.gov/pmc/a
rticles/PMC2131745) . PMID 17697328 (https://pubmed.ncbi.nlm.nih.gov/17697328) .

Skinner, David (2009). Introduction to Decision Analysis (3nd ed.). Probabilistic. ISBN 978-
0964793866.

Smith, J.Q. (1988). Decision Analysis: A Bayesian Approach. Chapman and Hall. ISBN 0-412-27520-
1.

Virine, L. & Trumper M. (2007). Project Decisions: The Art and Science. Vienna, VA: Management
Concepts. ISBN 978-1-56726-217-9.

Winkler, Robert L (2003). Introduction to Bayesian Inference and Decision (2nd ed.). Probabilistic.
ISBN 0-9647938-4-9.

External links

Society of Decision Professionals (http://www.decisionprofessionals.com/) , the professional

society supporting decision professionals as the advisors of choice when facing important,
complex decisions.

Decision Analysis (http://da.pubs.informs.org/) Archived (https://web.archive.org/web/200706

15090348/http://da.pubs.informs.org/) 2007-06-15 at the Wayback Machine, a journal of the
Institute for Operations Research and the Management Sciences

Decision Analysis Society (http://connect.informs.org/das/home) , a subdivision of the Institute

for Operations Research and the Management Sciences specializing in Decision Analysis

Decision Analysis in Health Care (https://web.archive.org/web/20061212230324/http://gunston.

gmu.edu/healthscience/730/default.asp) Online course from George Mason University
providing free lectures and tools for decision analysis modeling in health care settings.

Decision Analysis Affinity Group (http://www.daag.net/) , DAAG, has merged with and become
the annual conference of the Society of Decision Professionals. Formed as an informal group of
DA practitioners, DAAG was started in 1995 by Tom Spradlin, John Palmer, and David Skinner.
Decision Analysis Glossary (https://web.archive.org/web/20110711121820/http://grahamjeffery.
com/glossary)