Introduction

This chapter is concerned with individual values and preferences, as well as the process of choice. Perhaps no other subject in decision sciences has attracted so much attention because of its theoretical and practical importance. In economics, both the theoretical and econometric analyses of consumer and firm behavior, which form the very foundations of microand macro-economics, are firmly grounded in the utility theory paradigm, one of the major theories of valuation and choice to be discussed in this chapter. Similarly, in management science and business, theories of valuation and choice pervade nearly every functional area. In finance, the theory of capital markets, portfolio selection, investments, and savings functions are all analyzed in terms of the utility theory paradigm, generalized to include risk. Similarly, marketing, insurance, and operations rely heavily on this theory.

In the public sector as well, major decisions regarding both public goods (e.g., the location of a park) and public “bads” (e.g., the location of a noxious facility such as a hazardous waste incinerator) require an analysis of the values of individuals affected by these goods and bads. Indeed, values matter for all social choice problems in which regulators and politicians act in the name of the public. Increasingly, the public policy and management literatures dealing with problems of this sort have relied on explicit models of valuation to represent the preferences of the public.

We will utilize a framework that characterizes problems along three dimensions: alternatives, states of nature, and outcomes.