Decision Analysis in a Corporation

Abstract

The practical advantage of decision analysis is the decomposition of a complex problem into simpler parts that it makes possible. The consequences of a decision can be described in terms of contingent payoffs and then evaluated via independently assessed risk preferences (codified in a utility measure) and likelihood judgments (codified in a probability measure). In principle an (axiomatically consistent) individual can or should specify the requisite measures directly via various devices. Decision analysis in a multiperson enterprise, however, requires additional methods to construct such measures when they exist, or altemative measures if necessary. This paper reviews a cooperative sharing approach to multiperson decision analysis and compares it to the economic theory of risk markets. The qualitative properties of surrogate measures for an enterprise are described and related to the role of financial instruments, such as stocks and bonds. Cooperative behavior is assumed for the most part, but the role of game theory under uncertainty is also described briefly.