1. Rational decisions

2. Decision theory Normative: how to deliberate rationally?
Descriptive: the psychology of decisions. Why are we rational or irrational in certain cases?

3. Rational decision in general

4. Exercise
How do you choose a mobile phone or a car?

5. Példa: autóvásárlás

7. Rational decision method
Model of rational decision
Define the problem
Evaluate the stakes: what are the risks? What are the possible losses?
Understand the problem: gather information, reframe the situation.
Fix your approach for the solution.

8. Rational decision 2 Explore as many possible solutions as you can.
Attribute weights to different criteria according to their importance to you.
Si – The weight of a solution according to criteria i.
Estimate the probability of different solutions.
Pmi: m solution will pay out with P probability according to criteria i.
Calculate:
Subjective expected utility of every possible solution and choose the best.
Hm :Expected subjective utility of a certain solution
Hm= ∑ si * pmi

9. Decision table The problem: A. B. C. D. E. F. G. Criteria Weights
1. Solution according to criteria
Expected utility of solution 1. BxC
2. Solution according to criteria
Expected utility of solution 1. BxE
Solution 3.
1. krit. s1
p11
s1p11
p21
s1p21
2. krit. s2
p12
s2p12
p22
s2p22
3. krit. s3
p13
s3p13
p23
s3p23 …. …
∑si =100 * or
[-100, +100]
0≤p1i≤100 H1 H2

10. Exercise Make a rational decision: should you play lottery this week?
The jackpot is 900 million Ft and no one else will get jackpot.

11. Utility of different outcomes
Using a decision tree
Problem
Lehetőségek
Utility of different outcomes
Expected utility of
different outcomes
My numbers win
900 mFt + big happyness ≈ 1000mFt
1000mFt*pr=22,7 Ft pr
Yes
1-pr
-225Ft + small happyness ≈ -300 Ft
300*(1-pr)≈-300Ft
My numbers don’t win
Play lottery?
My numbers win pr
0Ft+ big happyness ≈ -100 mFt
≈-2,3Ft No
1-pr
My numbers don’t win
0Ft+small happyness≈ 225 Ft
≈225Ft
pr≈ 1/

12. Decide with the help of decision tree
I play lottery:
H1= 22,7+(-300)=-277,3 Ft
I don’s play lottery:
H2= -2,3+225=222,7 Ft
H1 H2 The rational choice is not to play lottery.

13. Comparing decision table with decision tree
Property based
Best if after the action there are no uncertainties.
Event-based
Can handle uncertainty

14. Comparing decision table with decision tree 2.
Helps to clarify the criteria
Focuses your attention to framing the problem and reflecting on the different evaluative criteria.
Helps to take into account the possible events relevant to your decision.
Helps to take into account external factors that might affect your decision.
Helps to understand multiple step decisions.

15. Limits of rational decision
Defining the problem
Assigning your preferences (weights)
Limits of information (options, probabilities)
Most of our decisions are boundedly rational.

16. Bounded rationality Bounded rationality in decisions
Does not maximize utility
Does not optimalize the decision
Only seeks a satisfycing solution.
Choose the most important criteria
Choose the first solution that appers to be good enough.s

17. Homework Describe a decision problem of your own.
Analyze the problem with decision tables and trees.
Create a decision table for the problem
Assign weights to the different criteria
Try to reframe the problem at least once
Draw a decision tree of the problem
Compare your results achieved by both of these methods.