Decision Sciences

Decison Making & Judgement

Fifth Capital’s provides an interdisciplinary approach to decision making through informed choice and the exercise of judgement.

Models of Rationality

Models of rationality function in a dual role - both describing how humans make decisions and attempting to prescribe on what bases decisions should be made so as to optimise outcomes i.e. choosing a single solution demonstrably superior to all others in contrast to a satisficing solution whether derived on its own or more likely as a set of solutions that simply meets or surpasses a set of necessary criteria.

Traditional models tend to promote the notion that humans can be described as fully or unboundedly rational agents that do not act against maximizing a calculable utility. However, with reference to the application of any models used to describe the non-linear chaotic functioning of the real World, it is illogical to search for a single quantitative optimal solution to any problem since to identify it as so requires a continually increasing amount and cost of resources - whether described as information, cognitive capability, analysis, time or otherwise - to sort through, reject and to then continue discriminating between increasingly similar options.

Quant or Quantitative Methods

Enterprises such as hedge funds for the most part account to stakeholders for market risk - the probability based on historical data of monetary loss through the unwanted realisation of downside price volatility. Models such as forward price models and event forecasting (as used say by investors and insurance underwriters) are distinct from scientific method or mathematics (although they are mathematisations of real world events) as they are not capable of specification a priori; they describe non-linear, stochastic processes that are modified by future events or news and they do not account for either short term dislocations or low probability (but possibly) high impact events or the individual weighting amongst stakeholders of the importance ascribed to each outcome.

Rationality that is Bounded

Bounded rationality is an approach to modeling ‘human agent’ decision-making that had its beginning in the work of noble laureate economists Herbert Simon and Reinhard Selten in the mid-1950s/early ‘60s and grew out of dissatisfaction with the fully rational approach described above. Bounded Rationality accounts for the resource limitations experienced by individuals and the heuristic tools/ norms employed to arrive at decisions.

It emphasises that prevailing models:

have little if any empirical support from Psychology and over-idealize decision-makers by not taking into account the social interactions, norms and cultural values that play key roles in decision-making;

do not account for uncertainty; and

ignore the fact that either no optimum solutions exist or if they do it is unrealistic to search for them as an infinite regress is created by the time and resources required to arrive at and confirm an optimum solution: as the range of available solutions narrows it becomes more difficult to differentiate between the remaining options thus requiring increasing amounts of time and information to find a single solution that is clearly superior to all others - cf solutions that meet minimum needs.

Stopping Function

Fifth Capital promotes recognition of rationality that is bounded - an approach that has gained recognition within both the Military and Medicine. Bounded rationality brings into relief the need for leadership together with the exercise of judgement and provides a foundation for Informed Choice architectures amongst stakeholders.

Fifth Capital further seeks to clarify the point beyond which the further refinement of information gathering and choice becomes ineffective within resource constraints; employing leading cognitive and information visualisation methodologies, Fifth Capital seeks to enable decision-makers to recognise the limitations of quantitative risk model outputs and thereafter to account for the influence of normative influences including societal and organizational cultures in the resolution of judgement in the face of competing knowledge claims and uncertainty.

Fifth Capital