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Introduction to Decision Analysis for Public Policy Decision-Making

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Introduction to Decision Analysis for Public Policy Decision-Making British Decision to Develop Radar During WWII Introduction to Decision Analysis for Public Policy Decision-Making Ross D. Shachter Management Science and Engineering Stanford University 1 © Ross D. Shachter MS&E 290, Public Policy Analysis 2 British Decision to Develop Radar During WWII The Serenity Prayer Choice between Infrared and Radar to detect God grant me German bombers the serenity to accept Churchill protégé advocated the things I cannot change, Uncertainties infrared, which would have the courage to change been ineffective the things I can, and Decisions Consequence: infrared the wisdom to know the difference. Decision Analysis would not have prevented a German invasion Reinhold Niebuhr (1892-1971) Right decision by chance Inspired by Friedrich Oetinger and Boethius. © Ross D. Shachter MS&E 290, Public Policy Analysis 3 © Ross D. Shachter MS&E 290, Public Policy Analysis 4 Action Actional Thought Thought Bayesian Perspective Some of our actions merit thought and reflection. We measure our beliefs about thosee uncertain Not all of our thoughts are focused on possibilities we care about using probabilities. interventions we can make in our world. Those probabilities are based on our current state Decision analysis lets us think clearly about a of information, &, from life experience, expert complex problem so that we can choose those opinions, and observation. actions that yield our preferred prospect. (There are no “objective” probabilities.) The quality of a decision is determined by the The possibilities are distinctions we impose on the process we use, not by the eventual outcome. world. We define them with enough clarity that A good decision can lead to a bad outcome. the uncertainty arises from our lack of knowledge, rather than from ambiguity. © Ross D. Shachter MS&E 290, Public Policy Analysis 5 © Ross D. Shachter MS&E 290, Public Policy Analysis 6 1 Decision Analysis for Public Decisions Uncertainties Decisions Policy and Prospects Prospect Individual Decision Maker A decision is an irrevocable allocation of resources, Identify single “rational” decision maker for public decision, such completely under the decision maker’s control. as President, Governor, etc. Doing nothing can be a decision. Many stakeholders are affected by public policy decisions and The decision to act or intervene in the world can have process should engage them multiple possible effects. Normative Approach A prospect is the future the decision maker faces with a How we would want choices made rather than how choices might otherwise be made in a political process particular set of choices. It can be a deal, made up of multiple possible prospects. Adds transparency and defensibility to a public process The decision maker should choose those actions and interventions that yield his/her preferred prospect. © Ross D. Shachter MS&E 290, Public Policy Analysis 7 © Ross D. Shachter MS&E 290, Public Policy Analysis 8 Decision Basis $20 Auction To build a model, we What can you do? We will conduct an auction address the following Alternatives questions: The highest bidder will receive a $20 bill What is your real Who makes the final problem/opportunity? The top TWO bidders have to pay commitment? Frame I reserve the right to back out of the deal Decision Maker Do we have a process? What do you want? Logical Reasoning Preferences Decision Analysis! What do you know? And afterwards? Information Commitment to Action © Ross D. Shachter MS&E 290, Public Policy Analysis 9 © Ross D. Shachter MS&E 290, Public Policy Analysis 10 The Normative Rules of Jane’s Party Problem Actional Thought ? Outdoors Jane wants to decide where & Porch Lead to a logically consistent normative to have her party but she is Indoors not prepared to compare analysis for a rational decision maker: the prospects of each 1. Given your observations and choices, you Party location. Weather can recognize each possibility that you care She recognizes that the Location about and you can assign a probability to it. party value depends on the Party 2. You can think about the prospect of each of weather. Value She consider the uncertain those possibilities, and you can identify a best possibilities for the prospect b and a worst prospect w. (These do Sun Weather to be Sun or Rain. & not have to be unique.) Rain © Ross D. Shachter MS&E 290, Public Policy Analysis 11 © Ross D. Shachter MS&E 290, Public Policy Analysis 12 2 Rules of Actional Thought Normative Analysis of (Continued) Jane’s Party Problem 0.4 3. For any prospect x, there is a number u(x), Sun & 0.6 for any party location 0 ≤ u(x) ≤ 1, such that: u(x) b Rain x ~ w 1-u(x) Party Outdoors Porch Indoors 4. You prefer prospect x to prospect y if and Values only if u(x) > u(y). Sun $100 $90 $40 5. If you are indifferent between prospects x b and y then you are indifferent between two deals if one can be formed from the other by Rain $0 $20 $50 w substituting x for y. For Jane, u(x) = x/$100 for any prospect value x. © Ross D. Shachter MS&E 290, Public Policy Analysis 13 © Ross D. Shachter MS&E 290, Public Policy Analysis 14 Normative Analysis of Value of Clairvoyance Jane’s Party Problem (Continued) Suppose Jane knows the weather (clairvoyance) before she chooses the party location: 0.4 $40 Sun $100 >> Outdoors $100 Outdoors 0.6 0.4 $100 Rain $0 Sun Porch $90 0.4 $70 Indoors $48 $48 Sun $90 & $40 & >> Porch 0.6 Rain $20 Outdoors $0 0.4 0.6 Rain $50 $46 Sun $40 Porch $20 Indoors 0.6 Rain $50 >> Indoors $50 To determine the prospect value of Jane’s decision The prospect value of Jane’s decision opportunity with opportunity, we must determine clairvoyance is $70. (It cannot decrease!) her prospect value for each party location Thus, she is willing to pay up to $22 = 70 - 48 for clairvoyance. her preferred choice for party location This is the most she would pay for any information. © Ross D. Shachter MS&E 290, Public Policy Analysis 15 © Ross D. Shachter MS&E 290, Public Policy Analysis 16 Sensitivity Analysis Decision Hierarchy $100 Frame determines the level at which this Policy Value decision is made Optimal Strategy Assuming levels above Indoors Porch Setting assumptions for Prospect Outdoors the levels below Tactics It is impractical to $0 relate each decision to Or to relate it to the 0.0 Probability of Sun 1.0 fundamental values detailed prospects © Ross D. Shachter MS&E 290, Public Policy Analysis 17 © Ross D. Shachter MS&E 290, Public Policy Analysis 18 3 US/Soviet Decisions during Decision Analysis Cycle Cuban Missile Crisis Continue to improve the modeled basis -- Both sides had “facts” that uncertainties, alternatives, preferences -- were not correct and did not until there is clarity of thought about action. understand each other Consequence: closest we Formulate Analyze Recognize ever came to a nuclear war Basis Model Decision Right decisions and good Opportunity Appraise process, but wrong Basis information Take Action © Ross D. Shachter MS&E 290, Public Policy Analysis 19 © Ross D. Shachter MS&E 290, Public Policy Analysis 20 Decision Determined by the decision process, not by the eventual outcome. Appropriate Frame: solving the Important Extensions Quality correct problem; Creative Alternatives: taking full advantage of the decision Value Models within Information Models Commitment to Action opportunity; the DA Framework Representing Information: accurate modeling of relationships in possibilities, relationships, Multiple objectives probabilities, and observations; graphical models Logic Risk aversion Values: capturing the important Probability assessment features of the decision maker's Time value of money preferences; Using experimental • capital expenditures Logical Reasoning: applying clear • deferred benefits evidence thinking to the entire decision Preferences Alternatives Information situation; and Multiple decision Commitment to Action: makers Frame implementation of the decision- maker's insights. © Ross D. Shachter MS&E 290, Public Policy Analysis 21 © Ross D. Shachter MS&E 290, Public Policy Analysis 22 In Closing A good decision can lead to a bad outcome. The quality of information available at the time of the actual decision is critical. You are always better off if you have More alternatives or More information © Ross D. Shachter MS&E 290, Public Policy Analysis 23 4.
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