Economics of Decision Making: Exploring Analytical Hierarchical Process (AHP)

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.