Decision Theory Essay

Tags: business economics crime money lottery risk decision theory public servant

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Decision Theory

Part One:

I tend to be risk-neutral, as much as possible, but like most people I can be a little bit risk averse. The situations in which I am most risk averse are those when taking the risk does not have a payoff that makes the risk worthwhile. This is probably closest to the minimax approach.

For me, risk is very much situational. There are a few variables that I take into consideration. The first is information. How much information I have will govern the amount of risk I'm willing to take in a situation. Even where I have strong motivation to take a risk, I feel that if I don't know enough, that I should be conservative. If the risk involves something with which I'm quite knowledgeable, I am far more likely to take the risk.

The second variable is how extreme the risk is – the upside or the downside. For example, while mathematically it makes no sense to play the lottery, the occasional ticket for a big draw has enough upside to accept that I'm probably lighting my money on fire. On the downside, there are some things where the downside risk, however minimal, is pretty severe. So while there is little risk in jaywalking, the idea that should something bad happen it would probably involve me going to hospital, I just don't see why I would take that risk, when I could cross in a safer manner just a bit further down the road. That said, I'm more likely to jaywalk in a place I frequent than some other city where maybe I don't know the traffic patterns.

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Taking these variables into account, my risk-taking behavior is still fairly risk neutral or slightly risk averse, but there are certain variables that could influence my decision in a way that convinces me to take more risk, every now and again.

In a public sector situation, I would probably always be risk averse. Given the complexity of decisions, I would know that there are things I do not know. Furthermore, if my decisions are going to affect other people, I will probably take a more risk averse approach, maybe even shift towards a maximin approach. For example, making a decision to invest taxpayer dollars in, say, a decision to upgrade police equipment. I would look at the downside, for example if I decline and some crime happens that the equipment could have helped prevent. That downside would drive my decision-making, because of how it affects other people.

Thus professional decision-making is a bit different, and definitely more risk averse than personal risk taking. That is part of being a public servant, to steward the public's resources in a safe and responsible manner. For me, that usually means minimizing the downside risk associated with my decisions. The police scenario is one….....

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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., & Wathen, S. A. (2009). An introduction to decision theory. In: Statistical techniques in business and economics (14th ed.). Columbus, OH: McGraw-Hill/Irwin. Retrieved from http://highered.mheducation.com/sites/dl/free/0073401765/663724/Lin01765_ch20_final.pdf

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