Decision Theory: Decision Models

This is part 2 of our series on Decision Theory, previous segments are available in our archives.

Visualizing Decisions

What is a decision? Simply put, it is a choice between a number of different options, each of which lead to some expected outcome. You can visualize a decision using what I call a Decision Model which are really just Flow charts. You have probably used Flow charts in the past to capture processes, which is exactly what we need for our decision making process!  For example, the following is a very generic decision model:

Decision Model
Decision models help you capture all the information you need in order to make an optimal decision:

  1. Enumeration of all possible choices.
  2. Understanding of the result of each choice.
  3. Understanding of the eventual outcomes.

Decision models make it easy to visualize all three of these. For example, let’s say we need to decide if we should hire another salesperson for our sales team. If we do hire the salesperson, it will cost some money (salary) in the short-term but likely lead to more sales in 6 months. That decision may look as follows:

Decision Model - Hire a Sales Person

As you can see, a decision model is just an easy way to make sure you understand all the options and outcomes for a decision by forcing you to write it down. You would never do this for every decision, but for the most important ones it’s a critical tool.

Tomorrow we’ll talk about how to understand outcomes when there is uncertainty involved, which is almost always the case in real life!

Quote of the Day: “In theory, there is no difference between theory and practice. But in practice, there is.” ― Yogi Berra