What makes some

decisions complex?

by Prof. Peter McBurney - p.j.mcburney [at]

csc.liv.ac.uk

Most real-world business decisions are

considerably more complex than the
example decisions discussed by academics
in decision theory and game theory. What
makes some decisions more complex than
others? Here I list some features, not all of
which are present in all decision situations.

• The problems are not posed in

a form amenable to classical
decision theory.

Decision theory requires the

decision-maker to know what
are his or her action-options,
what are the consequences of
these, what are the uncertain
events which may influence
these consequences, and what
are the probabilities of these
uncertain events (and to know
all these matters in advance of
the decision). Yet, for many
 real-world decisions, this
knowledge is either absent, or
may only be known in some
vague, intuitive, way. The drug
thalidomide, for example, was
tested thoroughly before it was
sold commercially -- on male
and female human subjects,
adults and children. The only
group not to be tested were
pregnant women, which were,
unfortunately, the main group
for which the drug had serious
side effects. These side effects
were consequences which had
not been imagined before the
decision to launch was made.
Decision theory does not tell us
how to identify the possible
consequences of some
decision, so what use is it in
real decisions?

• There are fundamental domain

uncertainties.

None of us know the future.

Even with considerable
investment in market research,
future demand for new
products may not be known
because potential customers
themselves do not know with
 any certainty what their future
demand will be. Moreover, in
many cases, we don't know the
past either. I have had many
experiences where participants
in a business venture have
disagreed profoundly about the
causes of failure, or success,
and so have taken very
different lessons from the
experience.

• Decisions may be unique (non-

repeated).

It is hard to draw on past

experience when something is
being done for the first time.
This does not stop people
trying, and so decision-making
by metaphor or by anecdote is
an important feature of real-
world decision-making, mostly
ignored by decision theorists.

• There may be multiple

stakeholders and participants
to the decision.

In developing a business plan

for a global satellite network,
for example, a decision-maker
would need to take account of
the views of a handful of
competitors, tens of major
investors, scores of minor
investors, approximately two
hundred national and
international
telecommunications regulators,
a similar number of national
company law authorities,
scores of upstream suppliers
(eg equipment manufacturers),
hundreds of employees,
hundreds of downstream
service wholesalers, thousands
of downstream retailers,
thousands or millions of
shareholders (if listed publicly),
and millions of potential
customers. To ignore or oppose
the views of any of these
stakeholders could doom the
business to failure. As it
happens, Game Theory isn't
much use with this number and
complexity of participants.

Moreover, despite the view

commonly held in academia,
most large Western
corporations operate with a
form of democracy. (If opinions
of intelligent, capable staff are
regularly over-ridden, these
 staff will simply leave, so
competition ensures
democracy. In addition, good
managers know that decisions
unsupported by their staff will
often be executed poorly, so
success of a decision may
depend on the extent to which
staff believe it has been
reached fairly.) Accordingly, all
major decisions are decided by
groups or teams, not at the sole
discretion of an individual.
Decision theorists, it seems to
me, have paid insufficient
attention to group decisions:
We hear lots about Bayesian
decision theory, but where, for
example, is the Bayesian theory
of combining subjective
probability assessments?

• Domain knowledge may be

incomplete and distributed
across these stakeholders.
• Beliefs, goals and preferences
of the stakeholders may be
diverse and conflicting.
• Beliefs, goals and preferences
of stakeholders, the
probabilities of events and the
consequences of decisions,
may be determined
endogenously, as part of the
decision process itself.

For instance, economists use

the term network goods to refer
to a good where one person's
utility depends on the utility of
others. A fax machine is an
example, since being the sole
owner of fax is of little value to
a consumer. Thus, a rational
consumer would determine his
or her preferences for such a
good only AFTER learning the
preferences of others. In other
words, rational preferences are
determined only in the course
of the decision process, not
beforehand.

Having considerable experience

in marketing, I contend that ALL
goods and services have a
network-good component. Even
so-called commodities, such as
natural resources or
telecommunications bandwidth,
have demand which is subject
to fashion and peer pressure.
You can't get fired for buying
IBM, was the old saying. And an
important function of
advertising is to allow potential
consumers to infer the likely
 preferences of other
consumers, so that they can
then determine their own
preferences. If the
advertisement appeals to
people like me, or people to
whom I aspire to be like, then I
can infer that those others are
likely to prefer the product
being advertized, and thus I
can determine my own
preferences for it. Similarly, if
the advertisement appeals to
people I don't aspire to be like,
then I can infer that I won't be
subject to peer pressure or
fashion trends, and can
determine my preferences
accordingly.

This is commonsense to
marketers, even if heretical to
many economists.

• The decision-maker may not

fully understand what actions
are possible until he or she
begins to execute.
• Some actions may change the
decision-making landscape,
particularly in domains where
there are many interacting
 participants.

A bold announcement by a
company to launch a new
product, for example, may
induce competitors to follow
and so increase (or decrease)
the chances of success. For
many goods, an ecosystem of
critical size may be required for
success, and bold initiatives
may act to create (or destroy)
such ecosystems.

• Measures of success may be

absent, conflicting or vague.
• The consequences of actions,
including their success or
failure, may depend on the
quality of execution, which in
turn may depend on attitudes
and actions of people not
making the decision.

Most business strategies are

executed by people other than
those who developed or
decided the strategy. If the
people undertaking the
execution are not fully
committed to the strategy, they
generally have many ways to
undermine or subvert it. In
military domains, the so-called
 Powell Doctrine, named after
former US Secretary of State
Colin Powell, says that foreign
military actions by a democracy
may only be successful if they
have majority public support. (I
have written on this topic
before.)

• As a corollary of the previous

feature, success of an action
may require extensive and
continuing dialog with relevant
stakeholders, before, during
and after its execution.

This is not news to anyone in

business.

• Success may require pre-

commitments before a decision
is finally taken.

In the 1990s, many

telecommunications companies
bid for national telecoms
licences in foreign countries.
Often, an important criterion
used by the Governments
awarding these licences was
how quickly each potential
operator could launch
commercial service. To ensure
 that they could launch service
quickly, some bidders resorted
to making purchase
committments with suppliers
and even installing equipment
ahead of knowing the outcome
of a bid, and even ahead of
deciding whether or not to bid.

• The consequences of decisions

may be slow to realize.

The oil industry usually works

on 50+ year cycles for major
investment projects. Satellite
mobile communications
networks have typically taken
ten years from serious
inception to launch of service.

• Decision-makers may influence

the consequences of decisions
and/or the measures of
success.
• Intelligent participants may
model each other in reaching a
decision, what I term reflexivity.

As a consequence, participants
are not only reacting to events
in their environment, they are
anticipating events and the
reactions and anticipations of
 other participants, and acting
proactively to these anticipated
events and reactions.
Traditional decision theory
ignores this. Following Nash,
traditional game theory has
modeled the outcomes of one
such reasoning process, but not
the processes themselves.
Evolutionary game theory may
prove useful for modeling these
reasoning processes, although
assuming a sequence of
repeated interactions does not
strike me as an immediate way
to model a process of
reflexivity. This problem still
awaits its Nash.

In my experience, classical decision theory

and game theory do not handle these
features very well; in some cases, indeed,
not at all. I contend that a new theory of
complex decisions is necessary to cope
with decision domains having these
features.