The Hunt for Better Decisions

December 14th, 2016
The Hunt for Better Decisions - The Hunt for Better Decisions

What do the choice of a specific technology for the NASA shuttle, choosing a marketing policy, selecting an airport location, assisting AIDS patients in Africa and the production of low-cost goods all have in common? The answer is a discipline called Decision Theory in which HEC Paris has a worldwide reputation for groundbreaking research, particularly in the branch of decisions made in the face of uncertainty. Research Professor Mohammed Abdellaoui has been exploring this complex, multidisciplinary, and little-known discipline for 24 years and is at the heart of its development over the past decade.

Bespectacled and affable, Mohammed Abdellaoui does not cut a figure of a hard-nosed theoretician at the cutting-edge of one of the West’s oft-overlooked sciences. Since 1992, the researcher has been studying and modeling our perceptions of risk and time when it comes to making decisions. In this, he is following footsteps that go back to the philosopher and mathematician Blaise Pascal. In the 17th century the Frenchman made a wager on people’s belief in God. This is seen as the first use of decision theory, laying the foundations for schools of thought such as existentialism, voluntarism and pragmatism. 

330 years later, Abdellaoui, freshly out of the University of Aix-Marseille III with a Ph.D. in mathematical economics and econometrics under his arm, joined the CNRS to study behavioral aspects of decision making. Reclining in his modest campus office in HEC’s W1 wing, he explains why: “In 1992, there was almost no experimental investigations about individual decision-making here in France. I was one of the first to run experimental investigations on individual behavior to test new decision theories.”

But how would Abdellaoui define this discipline which explores the reasoning behind a person’s choices? “To begin with, you have to understand that there are a number of overlaps: in Decision Theory, the object of study is the human being, so you have to deal with his/her psychology, preferences, beliefs. Traditionally, the discipline uses mathematical tools to model individual behavior. But the modern study of individual behavior under uncertainty needs more than that. We therefore combine maths, statistics, econometrics and microeconomics with psychology and philosophy.” Sounds complicated. “Yes,” he replies matter-of-factly, “you have to exhibit a lot of skills if you want to enjoy a career in this field.” 

Abdellaoui is interested in the study of decision making from two points of view. The first, descriptive, regards how people make their decisions. The second point of view is normative. It focuses on how to make the ‘best decisions’ while accounting for the decision maker’ beliefs and tastes. “Normativity is what distinguishes decision theory from behavioral psychology. Psychologists are not interested in normative rules involved in decision-making. They take behavior as it is, observing without judging. But economists and decision theorists must isolate what is ‘good’ and ‘bad’ in decision-making.”

The researcher is also editor-in-chief of Theory and Decision, an international multidisciplinary journal focusing on advances in Decision Science. He has built models which attempt to show us how to take decisions in the face of uncertainty and how to elaborate new rules of consistency and rationality. These aim at allowing business executives, policy-makers and individuals to make “good decisions” based on normative choice theories. He uses decision-aiding tools such as decisions trees, influences diagrams and Bayesian Networks (named after an 18th century statistician, this translates the state of the world into degrees of belief). Some of these are drawn on his office blackboard presenting a bewildering tapestry of algebraic formulae and equations.

“This science has evolved in a radical way in the past 30 years. We had to catch up with Anglo-Saxon researchers who pioneered new concepts of decision analysis in the Fifties and Sixties.” Abdellaoui picks out the remarkable career of Harvard University academic Howard Raiffa who passed away last July aged 92. Raiffa’s works on betting on horses led to US authorities using his Bayesian methods extensively, including the search for a missing US Air Force hydrogen bomb which disappeared off of Spain in 1966. “By then, American research had become predominant. Many big US companies and governmental agencies like NASA appealed to decision analysts and academic researchers to help them in the decision-making process. There is an American tradition of delegating when it comes to situations that are out of reach of a group’s expertise. This explains why applications of decision theories are most developed in the US.”

But, over the past decades, French academia - with HEC Paris at the forefront - have invested heavily in the field. And it shows: researchers in France followed the footsteps of the 1988 Nobel laureate Maurice Allais with pioneering work of their own, eagerly transmitted in university circles. “We provide students (Grande Ecole and MBA) with modern tools for modeling and solving complex decision-making challenges. We have become more and more international and connected to global research networks. As a result, progress in research on behavioral economics and decision-making in France is huge.” Abdellaoui was attracted to the dynamism of GREGHEC and joined the team at Jouy-en-Josas in 2007. “I was interested in how the business community makes daily decisions. At HEC, we compare observed behavior to the normative model and check if this is consistent or not. Here, I found the right environment for my field: international, a team of young researchers experimenting in real settings, and established figures like Itzhak Gilboa leading the group.” 

The diversity of axes of inquiry have also coalesced. “Beforehand, some researchers focused on decision-making under uncertainty, others studied it over time. Because uncertainty and time are intertwined, we are more interested in investigating individual behavior involving both time and uncertainty nowadays. We’ve therefore elaborated more complex models.” The key remains international exchanges, however. HEC Paris’ small team of researchers has acquired an unparalleled reputation for normative models and applications that work on ambiguity in decision-making. “Our Ph.D. students collaborate with the likes of Peter Klibanoff at Northwestern University, Manel Baucells at University of Virginia, Peter Wakker at Erasmus University. We also have a joint program with the University of Berlin, in India, where we’re studying decision-making over time in agriculture. A better understanding of the psychology of risk and time in such settings would allow efficiently using funds from international organizations. The results could go beyond India. In Africa, for example, international NGOs could invest more intelligently instead of making people dependent on (charitable) assistance.” 

Hard decision-making applications infuse a surprising diversity of fields. Abdellaoui enumerates a few, first on the microeconomic level: “You have the psychology of time and risk playing on people with AIDS in Africa. Without prior access by victims to appropriate health care programs, funding provided by organizations could not result in the improvement of their situation. Equally, the production of low-cost goods are subject to decision theories: if you know better temporal and risk preferences of decision-makers, you can adapt products to fit them.”

“Decision-making models also come into play for major economic players, like the transport giants SNCF and RATP, or aviation authorities who have to decide on the feasibility of building another airport in Notre-Dame-des-Landes or outside London. In these cases, you can make trade-offs. Decision-making is closely related to trade-offs. Take, for example, the increase in construction cost which is traded off with the drop in environmental concerns. An airport has multiple criteria that is either substitutable or complementary: access, hotel availability, cost, environmental damage, etc. Such criteria is relevant and help the authorities make a decision in difficult circumstances, using normative models.”

To vehicle such theories, decision scientists have turned to the language of mathematics and mathematical models. “It simplifies decision problem keeping important aspects within the picture,” explains Abdellaoui. He points to an equation on the blackboard. For the layman, it is indecipherable: W of p exponential of +/- RT times v of c. “This represents the value of a risky prospect today” the professor explains kindly. “And this is the value a year later, which is possibly less. We can convert our optimism in the future with this sign. And the ingredient of the model could explain that optimism.”

The researcher is optimistic about the future of decision sciences and long-term international collaborations. “Research is now global, we work alongside people with different expertise and skills, with easy access to data. We have to gather all this to create viable collaborations. So international cooperation is a must.” But the professor who also conducts research on the campus of Al Akhawayn, in the beautiful town of Ifrane, Morocco, remains guarded about isolationist calls emanating from Europe and the USA. “It’s a complex question,” he mutters, “Isolationism could negatively impact academic exchanges. Additionally, it could distort the rules of the game regarding international trade. For instance, if the US refrains from signing international agreements to reduce fossil fuels consumption, that would expose businesses to additional risks which have to be factored in.”

Meanwhile, Mohammed Abdellaoui prides himself in working in an environment where researchers and students are publishing major works on decision theory and applications in leading international reviews. He also insists on how his research could contribute to avoid cognitive distortions and biases in individual decision-making. “Students are provided with a catalogue of stylized facts in individual decision making. This shows them how to circumvent biases regarding preferences and beliefs.” An objective which is likely to spill into the business world when graduates embark on their own careers.