TITLE:
Economics of Decision Making: Exploring Analytical Hierarchical Process (AHP)
AUTHORS:
Jitendra Sharma
KEYWORDS:
Decision Making, Multi Criteria, Analytical Hierarchical Process, Pairwise Comparison, Eigen Vectors, Economics, Cost Benefit Analysis
JOURNAL NAME:
Theoretical Economics Letters,
Vol.8 No.14,
October
25,
2018
ABSTRACT: Decision making in any field, like all other
economic issues, involves allocating scarce resources to meet various needs. Since
ages decision making has always intrigued the mankind. A host of research study
has been conducted in past few decades on economics of decision making. A
number of very effective decision tools have been suggested which falls under
the category of multiple criteria decision making. The paper presents one such
decision making tool called Analytical Hierarchical Process (AHP), a technique
for complex decision making used for large-scale, multi-party, multi-criteria
decision analysis. AHP converts comparative evaluations to numerical values that
can be processed and weighed over the entire range of the problem. A numerical
weight or priority is derived for each element of the hierarchy, allowing
diverse and often incommensurable elements to be compared to one another in a
rational and consistent way. The objectives of the article are to understand
the interrelationship between considered criteria and available alternatives,
to grasp the basics of decision making and decision analysis and to use
decision making and decision analysis in assessing the scope for cost-reduction
(economics of decision making). The outcome of the study is a mathematical
solution to the perennial subjective decision making process in the form of a
structured methodology culled out from varied disciplines of economics, psychology
and mathematics. The applicability of the AHP Model is demonstrated with an
illustrative real life example.