c



  


  
 

Associates: George B. Dantzig, Robin Hogarth, Charles R. Piott, Howard Raiffa,

Thomas C. Schelling, Kennth A. Shepsle, Richard Thaier, Amos Tversky, and
Sidney Winter.

Simon was educated in political science at the University of Chicago (B.A., 1936,
Ph.D., 1943). He has held research and faculty positions at the University of
California (Berkeley), Illinois Institute of Technology and since 1949, Carnegie
Mellon University, where he is the Richard King Mellon University Professor of
Computer Science and Psychology. In 1978, he received the Alfred Nobel Memorial
Prize in Economic Sciences and in 1986 the National Medal of Science.

Reprinted with permission from j
  


   j      j

 
 
 
  

 
 
   
  1986 by the National
Academy of Sciences. Published by National Academy Press, Washington, DC.

v

 

The work of managers, of scientists, of engineers, of lawyers--the work that steers

the course of society and its economic and governmental organizations--is largely
work of making decisions and solving problems. It is work of choosing issues that
require attention, setting goals, finding or designing suitable courses of action, and
evaluating and choosing among alternative actions. The first three of these
activities--fixing agendas, setting goals, and designing actions--are usually called
 

 the last, evaluating and choosing, is usually called  



  Nothing is more important for the well-being of society than that this work
be performed effectively, that we address successfully the many problems requiring
attention at the national level (the budget and trade deficits, AIDS, national
security, the mitigation of earthquake damage), at the level of business
organizations (product improvement, efficiency of production, choice of
investments), and at the level of our individual lives (choosing a career or a school,
buying a house).

The abilities and skills that determine the quality of our decisions and problem
solutions are stored not only in more than 200 million human heads, but also in
tools and machines, and especially today in those machines we call computers.
This fund of brains and its attendant machines form the basis of our American
ingenuity, an ingenuity that has permitted U.S. society to reach remarkable levels
of economic productivity.

There are no more promising or important targets for basic scientific research than
understanding how human minds, with and without the help of computers, solve
problems and make decisions effectively, and improving our problem-solving and
decision-making capabilities. In psychology, economics, mathematical statistics,
operations research, political science, artificial intelligence, and cognitive science,
major research gains have been made during the past half century in
understanding problem solving and decision making. The progress already
achieved holds forth the promise of exciting new advances that will contribute
substantially to our nation's capacity for dealing intelligently with the range of
issues, large and small, that confront us.
Much of our existing knowledge about decision making and problem solving,
derived from this research, has already been put to use in a wide variety of
applications, including procedures used to assess drug safety, inventory control
methods for industry, the new expert systems that embody artificial intelligence
techniques, procedures for modeling energy and environmental systems, and
analyses of the stabilizing or destabilizing effects of alternative defense strategies.
(Application of the new inventory control techniques, for example, has enabled
American corporations to reduce their inventories by hundreds of millions of
dollars since World War II without increasing the incidence of stockouts.) Some of
the knowledge gained through the research describes the ways in which people
actually go about making decisions and solving problems; some of it prescribes
better methods, offering advice for the improvement of the process.

Central to the body of prescriptive knowledge about decision making has been the
theory of subjective expected utility (SEU), a sophisticated mathematical model of
choice that lies at the foundation of mos t contemporary economics, theoretical
statistics, and operations research. SEU theory defines the conditions of perfect
utility-maximizing rationality in a world of certainty or in a world in which the
probability distributions of all relevant variables can be provided by the decision
makers. (In spirit, it might be compared with a theory of ideal gases or of
frictionless bodies sliding down inclined planes in a vacuum.) SEU theory deals
only with decision making; it has nothing to say about how to frame pr oblems, set
goals, or develop new alternatives.

Prescriptive theories of choice such as SEU are complemented by empirical

research that shows how people actually make decisions (purchasing insurance,
voting for political candidates, or investing in securit ies), and research on the
processes people use to solve problems (designing switchgear or finding chemical
reaction pathways). This research demonstrates that people solve problems by
selective, heuristic search through large problem spaces and large data bases,
using means-ends analysis as a principal technique for guiding the search. The
expert systems that are now being produced by research on artificial intelligence
and applied to such tasks as interpreting oil-well drilling logs or making medical
diagnoses are outgrowths of these research findings on human problem solving.

What chiefly distinguishes the empirical research on decision making and problem
solving from the prescriptive approaches derived from SEU theory is the attention
that the former gives to the limits on human rationality. These limits are imposed
by the complexity of the world in which we live, the incompleteness and inadequacy
of human knowledge, the inconsistencies of individual preference and belief, the
conflicts of value among people and groups of people, and the inadequacy of the
computations we can carry out, even with the aid of the most powerful computers.
The real world of human decisions is not a world of ideal gases, frictionless planes,
or vacuums. To bring it within the scope of human thinking powers, we must
simplify our problem formulations drastically, even leaving out much or most of
what is potentially relevant.

The descriptive theory of problem solving and decision making is centrally

concerned with how people cut problems down to size: how they apply
approximate, heuristic techniques to handle complexity that cannot be handled
exactly. Out of this descriptive theory is emerging an augmented and amended
prescriptive theory, one that takes account of the gaps and elements of unrealism
in SEU theory by encompassing problem solving as well as choice and demanding
only the kinds of knowledge, consistency, and computational power that are
attainable in the real world.

The growing realization that coping with complexity is central to human decision
making strongly influences the directions of research in this domain. Operations
research and artificial intelligence are forging powerful new computational tools; at
the same time, a new body of mathematical theory is evolving around the topic of
computational complexity. Economics, which has traditionally derived both its
descriptive and prescriptive approaches from SEU theory, is now paying a great
deal of attention to uncertainty and incomplete information; to so-called "agency
theory," which takes account of the institutional framework within which decisions
are made; and to game theory, which seeks to deal with interindividual and
intergroup processes in which there is partial conflict of interest. Economists and
political scientists are also increasingly buttressing the empirical foundations of
their field by studying individual choice behavior directly and by studying behavior
in experimentally constructed markets and simulated political structures.

The following pages contain a fuller outline of current knowledge about decision
making and problem solving and a brief review of current research directions in
these fields as well as some of the principal research opportunities.

c   
 



The development of SEU theory was a major intellectual achievement of the first
half of this century. It gave for the first time a formally axiomatized statement of
what it would mean for an agent to behave in a consistent, rational matter. It
assumed that a decision maker possessed a utility function (an ordering by
preference among all the possible outcomes of choice), that all the alternatives
among which choice could be made were known, and that the consequences of
choosing each alternative could be ascertained (or, in the version of the theory that
treats of choice under uncertainty, it assumed that a subjective or objective
probability distribution of consequences was associated with each alternative). By
admitting subjectively assigned probabilities, SEU theory opened the way to fusing
subjective opinions with objective data, an approach that can also be used in man -
machine decision-making systems. In the probabilistic version of the theory,
Bayes's rule prescribes how people should take account of new information and
how they should respond to incomplete information.

The assumptions of SEU theory are very strong, permitting correspondingly strong
inferences to be made from them. Although the assumptions cannot be satisfied
even remotely for most complex situations in the real world, they may be satisfied
approximately in some microcosms--problem situations that can be isolated from
the world's complexity and dealt with independently. For example, the manager of a
commercial cattle-feeding operation might isolate the problem of finding the least
expensive mix of feeds available in the market that would meet all the nutritional
requirements of his cattle. The computational tool of linear programming, which is
a powerful method for maximizing goal achievement or minimizing costs while
satisfying all kinds of side conditions (in this case, the nutritional requirements),
can provide the manager with an optimal feed mix--optimal within the limits of
approximation of his model to real world conditions. Linear programming and
related operations research techniques are now used widely to make decisions
whenever a situation that reasonably fits their assumptions can be carved out of its
complex surround. These techniques have been especially valuable aids to middle
management in dealing with relatively well-structured decision problems.

Most of the tools of modern operations research--not only linear programming, but
also integer programming, queuing theory, decision trees, and other widely used
techniques--use the assumptions of SEU theory. They assume that what is desired
is to maximize the achievement of some goal, under specified constraints and
assuming that all alternatives and consequences (or their probability distributions)
are known. These tools have proven their usefulness in a wide variety of
applications.

 !

Operations research tools have also underscored dramatically the limits of SEU
theory in dealing with complexity. For example, present and prospective computers
are not even powerful enough to provide exact solutions for the problems of optimal
scheduling and routing of jobs through a typical factory that manufactures a
variety of products using many different tools and machines. And the mere thought
of using these computational techniques to determine an optimal national policy for
energy production or an optimal economic policy reveals their limits.

Computational complexity is not the only factor that limits the literal application of
SEU theory. The theory also makes enormous demands on information. For the
utility function, the range of available alternatives and the consequences following
from each alternative must all be known. Increasingly, research is being directed at
decision making that takes realistic account of the compromises and
approximations that must be made in order to fit real -world problems to the
informational and computational limits of people and computers, as well as to the
inconsistencies in their values and perceptions. The study of actual decision
processes (for example, the strategies used by corporations to make their
investments) reveals massive and unavoidable departures from the framework of
SEU theory. The sections that follow describe some of the things that have been
learned about choice under various conditions of incomplete information, limited
computing power, inconsistency, and institutional constraints on alternatives.
Game theory, agency theory, choice under uncertainty, and the theory of markets
are a few of the directions of this research, with the aims both of constructing
prescriptive theories of broader application and of providing more realistic
descriptions and explanations of actual decision making within U.S. economic and
political institutions.

c!!"!"

Although the limits of human rationality were stressed by some researchers in the
1950s, only recently has there been extensive activity in the field of economics
aimed at developing theories that assume less than fully rational choice on the part
of business firm managers and other economic agents. The newer theoretical
research undertakes to answer such questions as the following:

Op Are market equilibria altered by the departures of actual choice behavior

from the behavior of fully rational agents predicted by SEU theory?
 Op Under what circumstances do the processes of competition "police" markets
in such a way as to cancel out the effects of the departures from full
rationality?

Op In what ways are the choices made by boundedly rational agents different
from those made by fully rational agents?

Theories of the firm that assume managers are aiming at "satisfactory" profits or
that their concern is to maintain the firm's share of market in the industry make
quite different predictions about economic equilibrium than those derived from the
assumption of profit maximization. Moreover , the classical theory of the firm
cannot explain why economic activity is sometimes organized around large
business firms and sometimes around contractual networks of individuals or
smaller organizations. New theories that take account of differential access of
economic agents to information, combined with differences in self-interest, are able
to account for these important phenomena, as well as provide explanations for the
many forms of contracts that are used in business. Incompleteness and asymmetry
of information have been shown to be essential for explaining how individuals and
business firms decide when to face uncertainty by insuring, when by hedging, and
when by assuming the risk.

Most current work in this domain still assumes that economic agents seek to
maximize utility, but within limits posed by the incompleteness and uncertainty of
the information available to them. An important potential area of research is to
discover how choices will be changed if there are other departures from the axioms
of rational choice--for example, substituting goals of reaching specified aspiration
levels (satisficing) for goals of maximizing.

Applying the new assumptions about choice to economics leads to new empirically
supported theories about decision making over time. The classical theory of perfect
rationality leaves no room for regrets, second thoughts, or "weakness of will." It
cannot explain why many individuals enroll in Christmas savings plans, which
earn interest well below the market rate. More generally, it does not lead to correct
conclusions about the important social issues of saving and conservation. The
effect of pensions and social security on personal saving has been a controversial
issue in economics. The standard economic model predicts that an in crease in
required pension saving will reduce other saving dollar for dollar; behavioral
theories, on the other hand, predict a much smaller offset. The empirical evidence
indicates that the offset is indeed very small. Another empirical finding is that the
method of payment of wages and salaries affects the saving rate. For example,
annual bonuses produce a higher saving rate than the same amount of income
paid in monthly salaries. This finding implies that saving rates can be influenced
by the way compensation is framed.

If individuals fail to discount properly for the passage of time, their decisions will
not be optimal. For example, air conditioners vary greatly in their energy efficiency;
the more efficient models cost more initially but save money over the long run
through lower energy consumption. It has been found that consumers, on average,
choose air conditioners that imply a discount rate of 25 percent or more per year,
much higher than the rates of interest that prevailed at the time of the study.

As recently as five years ago, the evidence was thought to be unassailable that
markets like the New York Stock Exchange work efficiently--that prices reflect all
available information at any given moment in time, so that stock price movements
resemble a random walk and contain no systematic information that could be
exploited for profit. Recently, however, substantial departures from the behavior
predicted by the efficient-market hypothesis have been detected. For example,
small firms appear to earn inexplicably high returns on the market prices of their
stock, while firms that have very low price-earnings ratios and firms that have lost
much of their market value in the recent past also earn abnormally high returns.
All of these results are consistent with the empirical finding that decision makers
often overreact to new information, in violation of Bayes's rule. In the same way, it
has been found that stock prices are excessively volatile--that they fluctuate up and
down more rapidly and violently than they would if the market were efficient.

There has also been a long-standing puzzle as to why firms pay dividends.
Considering that dividends are taxed at a higher rate than capital gains, taxpaying
investors should prefer, under the assumptions of perfect rationality, that their
firms reinvest earnings or repurchase shares instead of paying dividends. (The
investors could simply sell some of their appreciated shares to obtain the income
they require.) The solution to this puzzle also requires models of investors that take
account of limits on rationality.

 #

In economic, political, and other social situations in which there is actual or

potential conflict of interest, especially if it is combined with incomplete
information, SEU theory faces special difficulties. In markets in which there are
many competitors (e.g., the wheat market), each buyer or seller can accept the
market price as a "given" that will not be affected materially by the actions of any
single individual. Under these conditions, SEU theory makes unambiguous
predictions of behavior. However, when a market has only a few suppliers --say, for
example, two--matters are quite different. In this case, what it is rational to do
depends on what one's competitor is going to do, and vice versa. Each supplier may
try to outwit the other. What then is the rational decision?

The most ambitious attempt to answer questions of this kind was the theory of
games, developed by von Neumann and Morgenstern and published in its full form
in 1944. But the answers provided by the theory of games are sometimes very
puzzling and ambiguous. In many situations, no single course of action dominates
all the others; instead, a whole set of possible solutions are all equally consistent
with the postulates of rationality.

One game that has been studied extensively, both theoretically and empirically, is
the Prisoner's Dilemma. In this game between two players, each has a choice
between two actions, one trustful of the other player, the other mistrustful or
exploitative. If both players choose the trustful alternative, both receive small
rewards. If both choose the exploitative alternative, both are punished. If one
chooses the trustful alternative and the other the exploitative alternative, the
former is punished much more severely than in the previous case, while the latter
receives a substantial reward. If the other player's choice is fixed but unknown, it is
advantageous for a player to choose the exploitative alternative, for this will give
him the best outcome in either case. But if both adopt this reasoning, they will
both be punished, whereas they could both receive rewards if they agreed upon the
trustful choice (and did not welch on the agreement).
The terms of the game have an unsettling resemblance to certain situations in the
relations between nations or between a company and the employees' union. The
resemblance becomes stronger if one imagines the game as being played
repeatedly. Analyses of "rational" behavior under assumptions of intended utility
maximization support the conclusion that the players will (ought to?) always make
the mistrustful choice. Nevertheless, in laboratory experiments with the game, it is
often found that players (even those who are expert in game theory) adopt a "tit-for-
tat" strategy. That is, each plays the trustful, cooperative strategy as long as his or
her partner does the same. If the partner exploits the player on a particular trial,
the player then plays the exploitative strategy on the next trial and continues to do
so until the partner switches back to the trustful strategy. Under these conditions,
the game frequently stabilizes with the players pursuing the mutually trustful
strategy and receiving the rewards.

With these empirical findings in hand, theorists have recently sought and found
some of the conditions for attaining this kind of benign stability. It occurs, for
example, if the players set aspirations for a satisfactory reward rather than seeking
the maximum reward. This result is consistent with the finding that in many
situations, as in the Prisoner's Dilemma game, people appear to satisfice rather
than attempting to optimize.

The Prisoner's Dilemma game illustrates an important point that is beginning to be

appreciated by those who do research on decision making. There are so many ways
in which actual human behavior can depart from the SEU assumptions that
theorists seeking to account for behavior are confronted with an embarrassment of
riches. To choose among the many alternative models that could account for the
anomalies of choice, extensive empirical research is called for--to see how people do
make their choices, what beliefs guide them, what information they have available,
and what part of that information they take into account and what part they
ignore. In a world of limited rationality, economics and the other decision sciences
must closely examine the actual limits on rationality in order to make accurate
predictions and to provide sound advice on public policy.

"c ""!c!"!

During the past ten years, empirical studies of human choices in which
uncertainty, inconsistency, and incomplete information are present have produced
a rich collection of findings which only now are beginning to be organized under
broad generalizations. Here are a few examples. When people are given information
about the probabilities of certain events (e.g., how many lawyers and how many
engineers are in a population that is being sampled), and then are given some
additional information as to which o f the events has occurred (which person has
been sampled from the population), they tend to ignore the prior probabilities in
favor of incomplete or even quite irrelevant information about the individual event.
Thus, if they are told that 70 percent of the population are lawyers, and if they are
then given a noncommittal description of a person (one that could equally well fit a
lawyer or an engineer), half the time they will predict that the person is a lawyer
and half the time that he is an engineer--even though the laws of probability dictate
that the best forecast is always to predict that the person is a lawyer.

People commonly misjudge probabilities in many other ways. Asked to estimate the
probability that 60 percent or more of the babies born in a ho spital during a given
week are male, they ignore information about the total number of births, although
it is evident that the probability of a departure of this magnitude from the expected
value of 50 percent is smaller if the total number of births is larger (the standard
error of a percentage varies inversely with the square root of the population size).

There are situations in which people assess the frequency of a class by the ease
with which instances can be brought to mind. In one experiment, subjects heard a
list of names of persons of both sexes and were later asked to judge whether there
were more names of men or women on the list. In lists presented to some subjects,
the men were more famous than the women; in other lists, the women were more
famous than the men. For all lists, subjects judged that the sex that had the more
famous personalities was the more numerous.

The way in which an uncertain possibility is presented may have a substantial

effect on how people respond to it. When asked whether they would choose surgery
in a hypothetical medical emergency, many more people said that they would when
the chance of survival was given as 80 percent than when the chance of death was
given as 20 percent.

On the basis of these studies, some of the general heuristics, or rules of thumb,
that people use in making judgments have been compiled---heuristics that produce
biases toward classifying situations according to their representativeness, or
toward judging frequencies according to the availability of examples in memory, or
toward interpretations warped by the way in which a problem has been framed.

These findings have important implications for public policy. A recent example is
the lobbying effort of the credit card industry to have differentials between cash
and credit prices labeled "cash discounts" rather than "credit surcharges." The
research findings raise questions about how to phrase cigarette warning labels or
frame truth-in-lending laws and informed consent laws.

c ""

Finding the underlying bases of human choice behavior is difficult. People cannot
always, or perhaps even usually, provide veridical accounts of how they make up
their minds, especially when there is uncertainty. In many cases, they can predict
how they will behave (pre-election polls of voting intentions have been reasonably
accurate when carefully taken), but the reasons people give for their choices can
often be shown to be rationalizations and not closely related to their real motives.

Students of choice behavior have steadily improved their research methods. They
question respondents about specific situations, rather than asking for
generalizations. They are sensitive to the dependence of answers on the exact forms
of the questions. They are aware that behavior in an experimental situation may be
different from behavior in real life, and they attempt to provide experimental
settings and motivations that are as realistic as possible. Using thinking -aloud
protocols and other approaches, they try to track the choice behavior step by step,
instead of relying just on information about outcomes or querying respondents
retrospectively about their choice processes.

Perhaps the most common method of empirical research in this field is still to ask
people to respond to a series of questions. But data obtained by this method are
being supplemented by data obtained from carefully designed laboratory
experiments and from observations of actual choice behavior (for example, the
behavior of customers in supermarkets). In an experimental study of choice,
subjects may trade in an actual market with real (if modest) monetary rewards and
penalties. Research experience has also demonstrated the feasibility of making
direct observations, over substantial periods of time, of the decision-making
processes in business and governmental organizations--for example, observations
of the procedures that corporations use in making new investments in plant and
equipment. Confidence in the empirical findings that have been accumulating over
the past several decades is enhanced by the general consistency that is observed
among the data obtained from quite different settings using different research
methods.

There still remains the enormous and challenging task of putting together these
findings into an empirically founded theory of decision making. With the growing
availability of data, the theory-building enterprise is receiving much better
guidance from the facts than it did in the past. As a result, we can expect it to
become correspondingly more effective in arriving at realistic models of behavior.

à
 

The theory of choice has its roots mainly in economics, statistics, and operations
research and only recently has received much attention from psychologists; the
theory of problem solving has a very different history. Problem solving was initially
studied principally by psychologists, and more recently by researchers in artificial
intelligence. It has received rather scant attention from economists.

"!$%&!#

Human problem solving is usually studied in laboratory settings, using problems

that can be solved in relatively short periods of time (seldom more than an hour),
and often seeking a maximum density of data about the solution process by asking
subjects to think aloud while they work. The thinking -aloud technique, at first
viewed with suspicion by behaviorists as subjective and "introspective," has
received such careful methodological attention in recent years that it can now be
used dependably to obtain data about subjects' behaviors in a wide range of
settings.

The laboratory study of problem solving has been supplemented by field studies of
professionals solving real-world problems--for example, physicians making
diagnoses and chess grandmasters analyzing game positions, and, as noted earlier,
even business corporations making investment decisions. Currently, historical
records, including laboratory notebooks of scientists, are also being used to study
problem-solving processes in scientific discovery. Although such records are far
less "dense" than laboratory protocols, they sometimes permit the course of
discovery to be traced in considerable detail. Laboratory notebooks of scientists as
distinguished as Charles Darwin, Michael Faraday, Antoine-Laurent Lavoisier, and
Hans Krebs have been used successfully in such research.

From empirical studies, a description can now be given of the problem -solving
process that holds for a rather wide range of activities. First, problem solving
generally proceeds by selective search through large sets of possibilities, using
rules of thumb (heuristics) to guide the search. Because the possibilities in realistic
problem situations are generally multitudinous, trial-and-error search would
simply not work; the search must be highly selective. Chess grandmasters seldom
examine more than a hundred of the vast number of possible scenarios that
confront them, and similar small numbers of searches are observed in other kinds
of problem-solving search.

One of the procedures often used to guide search is "hill climbing," using some
measure of approach to the goal to determine where it is most profitable to look
next. Another, and more powerful, common procedure is means-ends analysis. In
means-ends analysis, the problem solver compares the present situation with the
goal, detects a difference between them, and then searches memory for actions that
are likely to reduce the difference. Thus, if the difference is a fifty-mile distance
from the goal, the problem solver will retrieve from memory knowledge about autos,
carts, bicycles, and other means of transport; walking and flying will probably be
discarded as inappropriate for that distance.

The third thing that has been learned about problem solving--especially when the
solver is an expert--is that it relies on large amounts of information that are stored
in memory and that are retrievable whenever the solver recognizes cues signaling
its relevance. Thus, the expert knowledge of a diagnostician is evoked by the
symptoms presented by the patient; this knowledge leads to the recollection of what
additional information is needed to discriminate among alternative diseases and,
finally, to the diagnosis.

In a few cases, it has been possible to estimate how many patterns an expert must
be able to recognize in order to gain access to the relevant knowledge stored in
memory. A chess master must be able to recognize about 50,000 different
configurations of chess pieces that occur frequently in the course of chess games. A
medical diagnostician must be able to recognize tens of thousands of configurations
of symptoms; a botanist or zoologist specializing in taxonomy, tens or hundreds of
thousands of features of specimens that define their species. For comparison,
college graduates typically have vocabularies in their native languages of 50,000 to
200,000 words. (However, these numbers are very small in comparison with the
real-world situations the expert faces: there are perhaps 10 120 branches in the
game tree of chess, a game played with only six kinds of pieces on an 8 x 8 board.)

One of the accomplishments of the contemporary theory of problem solving has

been to provide an explanation for the phenomena of intuition and judgment
frequently seen in experts' behavior. The store of expert knowledge, "indexed" by
the recognition cues that make it accessible and combined with some basic
inferential capabilities (perhaps in the form of means-ends analysis), accounts for
the ability of experts to find satisfactory solutions for difficult problems, and
sometimes to find them almost instantaneously. The expert's "intuition" and
"judgment" derive from this capability for rapid recognition linked to a large store of
knowledge. When immediate intuition fails to yield a problem solution or when a
prospective solution needs to be evaluated, the expert falls back on the slower
processes of analysis and inference.

'! "!#!"

Over the past thirty years, there has been close teamwork between research in
psychology and research in computer science aimed at developing intelligent
programs. Artificial intelligence (AI) research has both borrowed from and
contributed to research on human problem solving. Today, artificial intelligence is
beginning to produce systems, applied to a variety of tasks, that can solve difficult
problems at the level of professionally trained humans. These AI programs are
usually called expert systems. A description of a typical expert system would
resemble closely the description given above of typical human problem solving; the
differences between the two would be differences in degree, not in kind. An AI
expert system, relying on the speed of computers and their ability to retain large
bodies of transient information in memory, will generally use "brute force"--sheer
computational speed and power--more freely than a human expert can. A human
expert, in compensation, will generally have a richer set of heuristics to guide
search and a larger vocabulary of recognizable patterns. To the observer, the
computer's process will appear the more systematic and even compulsive, the
human's the more intuitive. But these are quantitative, not qualitative, differences.

The number of tasks for which expert systems have been built is increasing rapidly.
One is medical diagnosis (two examples are the CADUCEUS and MYCIN programs).
Others are automatic design of electric motors, generators, and transformers
(which predates by a decade the invention of the term ! 
"
 
#$ the
configuration of computer systems from customer specifications, and the automatic
generation of reaction paths for the synthesis of organic molecules. All of these (and
others) are either being used currently in professional or industrial practice or at
least have reached a level at which they can produce a professionally acceptable
product.

Expert systems are generally constructed in close consultation with the people who
are experts in the task domain. Using standard techniques of observation and
interrogation, the heuristics that the human expert uses, implicitly and often
unconsciously, to perform the task are gradually educed, made explicit, and
incorporated in program structures. Although a great deal has been learned about
how to do this, improving techniques for designing expert systems is an important
current direction of research. It is especially important because expert systems,
once built, cannot remain static but must be modifiable to incorporate new
knowledge as it becomes available.

c!#(%"c$

In the 1950s and 1960s, research on problem solving focused on clearly structured
puzzle-like problems that were easily brought into the psychological laboratory and
that were within the range of computer programming sophistication at that time.
Computer programs were written to discover proofs for theorems in Euclidean
geometry or to solve the puzzle of transporting missionaries and cannibals across a
river. Choosing chess moves was perhaps the most complex task that received
attention in the early years of cognitive science and AI.

As understanding grew of the methods needed to handle these relatively simple

tasks, research aspirations rose. The next main target, in the 1960s and 1970s,
was to find methods for solving problems that involved large bodies of semantic
information. Medical diagnosis and interpreting mass spectrogram data are
examples of the kinds of tasks that were investigated during this period and for
which a good level of understanding was achieved. They are tasks that, for all of the
knowledge they call upon, are still well structured, with clear-cut goals and
constraints.

The current research target is to gain an understanding of problem-solving tasks

when the goals themselves are complex and sometimes ill defined, and when the
very nature of the problem is successively transformed in the course of exploration.
To the extent that a problem has these characteristics, it is usually called ill
structured. Because ambiguous goals and shifting problem formulations are typical
characteristics of problems of design, the work of architects offers a good example
of what is involved in solving ill -structured problems. An architect begins with
some very general specifications of what is wanted by a client. The initial goals are
modified and substantially elaborated as the archit ect proceeds with the task.
Initial design ideas, recorded in drawings and diagrams, themselves suggest new
criteria, new possibilities, and new requirements. Throughout the whole process of
design, the emerging conception provides continual feedback that reminds the
architect of additional considerations that need to be taken into account.

With the current state of the art, it is just beginning to be possible to construct
programs that simulate this kind of flexible problem -solving process. What is called
for is an expert system whose expertise includes substantial knowledge about
design criteria as well as knowledge about the means for satisfying those criteria.
Both kinds of knowledge are evoked in the course of the design activity by the
usual recognition processes, and the evocation of design criteria and constraints
continually modifies and remolds the problem that the design system is addressing.
The large data bases that can now be constructed to aid in the management of
architectural and construction projects provide a framework into which AI tools,
fashioned along these lines, can be incorporated.

Most corporate strategy problems and governmental policy problems are at least as
ill structured as problems of architectural or engineering design. The tools now
being forged for aiding architectural design will provide a basis for building tools
that can aid in formulating, assessing, and monitoring public energy or
environmental policies, or in guiding corporate product and investment strategies.

!##!c!c!!#$

The very first steps in the problem-solving process are the least understood. What
brings (and should bring) problems to the head of the agenda? And when a problem
is identified, how can it be represented in a way that facilitates its solution?

The task of setting an agenda is of utmost importance because both individual

human beings and human institutions have limited capacities for dealing with
many tasks simultaneously. While some problems are receiving full attention,
others are neglected. Where new problems come thick and fast, "fire fighting"
replaces planning and deliberation. The facts of limited attention span, both for
individuals and for institutions like the Congress, are well known. However,
relatively little has been accomplished toward analyzing or designing effective
agenda-setting systems. A beginning could be made by the study of "alerting"
organizations like the Office of Technology Assessment or military and foreign
affairs intelligence agencies. Because the research and development function in
industry is also in considerable part a task of monitoring current and prospective
technological advances, it could also be studied profitably from this standpoint.

The way in which problems are represented has much to do with the quality of the
solutions that are found. The task of designing highways or dams takes on an
entirely new aspect if human responses to a changed environment are taken into
account. (New transportation routes cause people to move their homes, and people
show a considerable propensity to move into zones that are subject to flooding
when partial protections are erected.) Very different social welfare policies are
usually proposed in response to the problem of providing incentives for economic
independence than are proposed in response to the problem of taking care of the
needy. Early management information systems were designed on the assumption
that information was the scarce resource; today, because designers recognize that
the scarce resource is managerial attention, a new framework produces quite
different designs.

The representation or "framing" of problems is even less well understood than

agenda setting. Today's expert systems make use of problem representations that
already exist. But major advances in human knowledge frequently derive from new
ways of thinking about problems. A large part of the history of physics in
nineteenth-century England can be written in terms of the shift from action-at-a-
distance representations to the field representations that were developed by the
applied mathematicians at Cambridge.

Today, developments in computer-aided design (CAD) present new opportunities to

provide human designers with computer-generated representations of their
problems. Effective use of these capabilities requires us to understand better how
people extract information from diagrams and other displays and how displays can
enhance human performance in design tasks. Research on representations is
fundamental to the progress of CAD.

"!$&!#

Nothing has been said so far about the radical changes that have been brought
about in problem solving over most of the domains of science and engineering by
the standard uses of computers as computational devices. Although a few examples
come to mind in which artificial intelligence has contributed to these developments,
they have mainly been brought about by research in the individual sciences
themselves, combined with work in numerical analysis.

Whatever their origins, the massive computational applications of computers are

changing the conduct of science in numerous ways. There are new specialties
emerging such as "computational physics" and "computational chemistry."
Computation--that is to say, problem solving--becomes an object of explicit concern
to scientists, side by side with the substance of the science itself. Out of this new
awareness of the computational component of scientific inquiry is arising an
increasing interaction among computational specialists in the various sciences and
scientists concerned with cognition and AI. This interaction extends well beyond
the traditional area of numerical analysis, or even the newer subject of
computational complexity, into the heart of the theory of problem solving.

Physicists seeking to handle the great mass of bubble-chamber data produced by

their instruments began, as early as the 1960s, to look to AI for pattern recognition
methods as a basis for automating the analysis of their data. The construction of
expert systems to interpret mass spectrogram data and of other systems to design
synthesis paths for chemical reactions are other examples of problem solving in
science, as are programs to aid in matching sequences of nucleic acids in DNA and
RNA and amino acid sequences in proteins.

Theories of human problem solving and learning are also beginning to attract new
attention within the scientific community as a basis for improving science teaching.
Each advance in the understanding of problem solving and learning processes
provides new insights about the ways in which a learner must store and index new
knowledge and procedures if they are to be useful for solving problems. Research
on these topics is also generating new ideas about how effective learning takes
place--for example, how students can learn by examining and analyzing worked-out
examples.


  

Opportunities for advancing our understanding of decision making and problem

solving are not limited to the topics dealt with above, and in this section, just a few
indications of additional promising directions for research are presented.

c"!)!#&

The time dimension is especially troublesome in decision making. Economics has

long used the notion of time discounting and interest rates to compare present with
future consequences of decisions, but as noted above, research on actual decision
making shows that people frequently are inconsistent in their choices between
present and future. Although time discounting is a powerful idea, it requires fixing
appropriate discount rates for individual, and especially social, decisions.
Additional problems arise because human tastes and priorities change over time.
Classical SEU theory assumes a fixed, consistent utility function, which does not
easily accommodate changes in taste. At the other extreme, theories postulating a
limited attention span do not have ready ways of ensuring consistency of choice
over time.

###!

In applying our knowledge of decision making and problem solving to society -wide,
or even organization-wide, phenomena, the problem of aggregation must be solved;
that is, ways must be found to extrapolate from theories of individual decision
processes to the net effects on the whole economy, polity, and society. Because of
the wide variety of ways in which any given decision task can be approached, it is
unrealistic to postulate a "representative firm" or an "economic man," and to simply
lump together the behaviors of large numbers of supposedly identical individuals.
Solving the aggregation problem becomes more important as more of the empirical
research effort is directed toward studying behavior at a detailed, microscopic
level.

#!*!

Related to aggregation is the question of how decision making and problem solving
change when attention turns from the behavior of isolated individuals to the
behavior of these same individuals operating as members of organizations or other
groups. When people assume organizational positions, they adapt their goals and
values to their responsibilities. Moreover, their decisions are influenced
substantially by the patterns of information flow and other communications among
the various organization units.

Organizations sometimes display sophisticated capabilities far beyond the

understanding of single individuals. They sometimes make enormous blunders or
find themselves incapable of acting. Organizational performance is highly sensitive
to the quality of the routines or "performance programs" that govern behavior and
to the adaptability of these routines in t he face of a changing environment. In
particular, the "peripheral vision" of a complex organization is limited, so that
responses to novelty in the environment may be made in inappropriate and quasi-
automatic ways that cause major failure.

Theory development, formal modeling, laboratory experiments, and analysis of

historical cases are all going forward in this important area of inquiry. Although the
decision-making processes of organizations have been studied in the field on a
limited scale, a great many more such intensive studies will be needed before the
full range of techniques used by organizations to make their decisions is
understood, and before the strengths and weaknesses of these techniques are
grasped.

!!#

Until quite recently, most research in cognitive science and artificial intelligence
had been aimed at understanding how intelligent systems perform their work. Only
in the past five years has attention begun to turn to the question of how systems
become intelligent--how they learn. A number of promising hypotheses about
learning mechanisms are currently being explored. One is the so-called
connexionist hypothesis, which postulates networks that learn by changing the
strengths of their interconnections in response to feedback. Another learning
mechanism that is being investigated is the adaptive production system, a
computer program that learns by generating new instructions that are simply
annexed to the existing program. Some success has been achieved in constructing
adaptive production systems that can learn to solve equations in algebra and to do
other tasks at comparable levels of difficulty.

Learning is of particular importance for successful adaptation to an environment

that is changing rapidly. Because that is exactly the environment of the 1980s, the
trend toward broadening research on decision making to include learning and
adaptation is welcome.

This section has by no means exhausted the areas in which exciting and important
research can be launched to deepen understanding of decision making and
problem solving. But perhaps the examples that have been provided are sufficient
to convey the promise and significance of this field of inquiry today.

ë
 à 


Most of the current research on decision making and problem solving is carried on
in universities, frequently with the support of government funding agencies and
private foundations. Some research is done by consulting firms in connection with
their development and application of the t ools of operations research, artificial
intelligence, and systems modeling. In some cases, government agencies and
corporations have supported the development of planning models to aid them in
their policy planning--for example, corporate strategic planning for investments and
markets and government planning of environmental and energy policies. There is
an increasing number of cases in which research scientists are devoting
substantial attention to improving the problem-solving and decision-making tools
in their disciplines, as we noted in the examples of automation of the processing of
bubble-chamber tracks and of the interpretation of mass spectrogram data.
To use a generous estimate, support for basic research in the areas described in
this document is probably at the level of tens of millions of dollars per year, and
almost certainly, it is not as much as $100 million. The principal costs are for
research personnel and computing equipment, the former being considerably
larger.

Because of the interdisciplinary character of the research domain, federal research

support comes from a number of different agencies, and it is not easy to assess the
total picture. Within the National Science Foundation (NSF), the grants of the
decision and management sciences, political science and the economics programs
in the Social Sciences Division are to a considerable extent devoted to projects in
this domain. Smaller amounts of support come from the memory and cognitive
processes program in the Division of Behavioral and Neural Sciences, and perhaps
from other programs. The "software" component of the new NSF Directorate of
Computer Science and Engineering contains programs that have also provided
important support to the study of decision making and problem solving.

The Office of Naval Research has, over the years, supported a wide range of studies
of decision making, including important early support for operations research. The
main source of funding for research in AI has been the Defense Advanced Research
Projects Agency (DARPA) in the Department of Defense; important support for
research on applications of A1 to medicine has been provided by the National
Institutes of Health.

Relevant economics research is also funded by other federal agencies, including the
Treasury Department, the Bureau of Labor Statistics, and the Federal Reserve
Board. In recent years, basic studies of decision making have received only
relatively minor support from these sources, but because of the relevance of the
research to their missions, they could become major sponsors.

Although a number of projects have been and are funded by private foundations,
there appears to be at present no foundation for which decision making and
problem solving are a major focus of interest.

In sum, the pattern of support for research in this field shows a healthy diversity
but no agency with a clear lead responsibility, unless it be the rather modestly
funded program in decision and management sciences at NSF. Perhaps the largest
scale of support has been provided by DARPA, where decision making and problem
solving are only components within the larger area of artificial intelligence and
certainly not highly visible research targets.

The character of the funding requirements in this domain is much the same as in
other fields of research. A rather intensive use of computational facilities is typical
of most, but not all, of the research. And because the field is gaining new
recognition and growing rapidly, there are special needs for the support of graduate
students and postdoctoral training. In the computing-intensive part of the domain,
desirable research funding per principal investigator might average $250,000 per
year; in empirical research involving field studies and large-scale experiments, a
similar amount; and in other areas of theory and laboratory experimentation,
somewhat less.

 
 
 



The study of decision making and problem solving has attracted much attention
through most of this century. By the end of World War II, a powerful prescriptive
theory of rationality, the theory of subjective expected utility (SEU), had taken form;
it was followed by the theory of games. The past forty years have seen widespread
applications of these theories in economics, operations research, and sta tistics,
and, through these disciplines, to decision making in business and government.

The main limitations of SEU theory and the developments based on it are its
relative neglect of the limits of human (and computer) problem-solving capabilities
in the face of real-world complexity. Recognition of these limitations has produced
an increasing volume of empirical research aimed at discovering how humans cope
with complexity and reconcile it with their bounded computational powers.
Recognition that human rationality is limited occasions no surprise. What is
surprising are some of the forms these limits take and the kinds of departures from
the behavior predicted by the SEU model that have been observed. Extending
empirical knowledge of actual human cognitive processes and of techniques for
dealing with complexity continues to be a research goal of very high priority. Such
empirical knowledge is needed both to build valid theories of how the U.S. society
and economy operate and to build prescriptive tools for decision making that are
compatible with existing computational capabilities.

The complementary fields of cognitive psychology and artificial intelligence have

produced in the past thirty years a fairly well-developed theory of problem solving
that lends itself well to computer simulation, both for purposes of testing its
empirical validity and for augmenting human problem -solving capacities by the
construction of expert systems. Problem-solving research today is being extended
into the domain of ill-structured problems and applied to the task of formulating
problem representations. The processes for setting the problem agenda, which are
still very little explored, deserve more research attention.

The growing importance of computational techniques in all of t he sciences has

attracted new attention to numerical analysis and to the topic of computational
complexity. The need to use heuristic as well as rigorous methods for analyzing
very complex domains is beginning to bring about a wide interest, in various
sciences, in the possible application of problem-solving theories to computation.

Opportunities abound for productive research in decision making and problem

solving. A few of the directions of research that look especially promising and
significant follow:

Op A substantially enlarged program of empirical studies, involving direct

observation of behavior at the level of the individual and the organization,
and including both laboratory and field experiments, will be essential in
sifting the wheat from the chaff in the large body of theory that now exists
and in giving direction to the development of new theory.

Op Expanded research on expert systems will require extensive empirical study

of expert behavior and will provide a setting for basic research on how ill-
structured problems are, and can be, solved.

Op Decision making in organizational settings, which is much less well

understood than individual decision making and problem solving, can be
studied with great profit using already established methods of inquiry,
 especially through intensive long-range studies within individual
organizations.

Op The resolution of conflicts of values (individual and group) and of

inconsistencies in belief will continue to be highly productive directions of
inquiry, addressed to issues of great importance to society.

Op Setting agendas and framing problems are two related but poorly understood
processes that require special research attention and that now seem open to
attack.

These five areas are examples of especially promising research opportunities drawn
from the much larger set that are described or hinted at in this report.

The tools for decision making developed by previous research have already found
extensive application in business and government organizations. A number of such
applications have been mentioned in this report, but they so pervade organizations,
especially at the middle management and professional levels, that people are often
unaware of their origins.

Although the research domain of decision making and problem solving is alive and
well today, the resources devoted to that research are modest in scale (of the order
of tens of millions rather than hundreds of millions of dollars). They are not
commensurate with either the identified research opportunities or the human
resources available for exploiting them. The prospect of throwing new light on the
ancient problem of mind and the prospect of enhancing the powers of mind with
new computational tools are attracting substantial numbers of first -rate young
scientists. Research progress is not limited either by lack of excellent research
problems or by lack of human talent eager to get on with the job.

Gaining a better understanding of how problems can be solved and decisions made
is essential to our national goal of in creasing productivity. The first industrial
revolution showed us how to do most of the world's heavy work with the energy of
machines instead of human muscle. The new industrial revolution is showing us
how much of the work of human thinking can be done by and in cooperation with
intelligent machines. Human minds with computers to aid them are our principal
productive resource. Understanding how that resource operates is the main road
open to us for becoming a more productive society and a society able to deal with
the many complex problems in the world today.