Theoretical and experimental examinations of target-based decision making

Hupman, Andrea C.

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https://hdl.handle.net/2142/78738 Copy

Description

Title

Theoretical and experimental examinations of target-based decision making

Author(s)

Hupman, Andrea C.

Issue Date

2015-04-20

Director of Research (if dissertation) or Advisor (if thesis)

Abbas, Ali E.

Doctoral Committee Chair(s)

Beck, Carolyn

Committee Member(s)

• Price, Raymond
• Michael, Steven

Department of Study

Industrial&Enterprise Sys Eng

Discipline

Systems & Entrepreneurial Engr

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

• decision analysis
• Incentives
• targets
• target-based decision making

Abstract

Target based decision making occurs when a decision maker wishes to maximize the probability of attaining some output or performance level. The target may be set externally, for example, by an employer as part of an incentive system. Or, the target may simply be based on a decision maker’s individual goals and understanding of implicit expectations. Questions arise concerning the effects of these decisions on the performance of an organization. Further, if these decisions affect organizational value, how well can these decisions be characterized and predicted? This research explores these questions—and others—using both theoretical and experimental means. A value gap model is developed that facilitates simulation based insights to target optimality. The effect of a target is characterized in terms of a value gap that is defined as the difference in value between what was selected based on a target and what the organization would have preferred. A copula based method is used to simulate future decision situations and the expected value gap is calculated as a function of model parameters. Several trends in target optimality are observed that are robust to changes in the probability distributions over future decision alternatives. Specifically, the optimal target (i) decreases as the organization’s risk aversion increases, (ii) increases as the number of available alternatives increase, and (iii) the presence of an efficient frontier of decision alternatives reduces the consequences of setting targets higher than optimal. A behavioral experiment is conducted to compare target-based decision making to decisions in the absence of a target. The results show that while target based decision making can be well predicted based on the properties of the decision alternatives alone. Decisions in the absence of a target, however, cannot be predicted based on the alternatives alone. Information about individualized differences in risk preferences is required to identify trends in the decision making behavior. These results have strong implications for decisions about whether or not to used target based incentives within an organization. The research concludes with an application to engineering systems and a discussion of additional questions raised by the research that point to directions for new research.

Graduation Semester

2015-5

Type of Resource

text

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http://hdl.handle.net/2142/78738

Copyright and License Information

Copyright 2015 Andrea C. Hupman

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