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  Choice under uncertainty The area of choice under uncertainty represents the heart of decision theory. Known from the 17th century (Blaise pascal invoked it in his famous wager, which is contained in his  pensees,  published in 1670), the idea of expected values is that, when faced with a number of actions, each of which could give rise to more than one possible outcome with different probabilities, the rational procedure is to identify all possible outcomes, determine their values (positive or negative) and the probabilities that will result from each course of action, and multiply the two to give an "expected value", or the average expectation for an outcome; the action to be chosen should be the one that gives rise to the highest total expected value. In 1738, Daniel bournouli  published an influential paper entitled  Exposition of a New Theory on the Measurement of Risk , in which he uses the st, petersburg to show that e...

  Intertemporal choice Intertemporal choice is concerned with the kind of choice where different actions lead to outcomes that are realised at different stages over time. It is also described as cost-benefit decision making since it involves the choices between rewards that vary according to magnitude and time of arrival. If someone received a windfall of several thousand dollars, they could spend it on an expensive holiday, giving them immediate pleasure, or they could invest it in a pension scheme, giving them an income at some time in the future. What is the optimal thing to do? The answer depends partly on factors such as the expected  rates of interest and inflation, the person's life expectations, and their confidence in the pensions industry. However even with all those factors taken into account, human behavior again deviates greatly from the predictions of prescriptive decision theory, leading to alternative models in which, for example, objec...

  Complex decisions Other areas of decision theory are concerned with decisions that are difficult simply because of their complexity, or the complexity of the organization that has to make them. Individuals making decisions are limited in resources (i.e. time and intelligence) and are therefore boundedly; the issue is thus, more than the deviation between real and optimal behaviour, the difficulty of determining the optimal behaviour in the first place. One example is the model of economic growth and resource usage developed by the Club rome to help politicians make real-life decisions in complex situations. Decisions are also affected by whether options are framed together or separately; this is known as the distincation bias.

  Interaction of decision makers Some decisions are difficult because of the need to take into account how other people in the situation will respond to the decision that is taken. The analysis of such social decisions is more often treated under the label of game theory, rather than decision theory, though it involves the same mathematical methods. From the standpoint of game theory, most of the problems treated in decision theory are one-player games (or the one player is viewed as playing against an impersonal background situation). In the emerging field of socio-cognative engineering, the research is especially focused on the different types of distributed decision-making in human organizations, in normal and abnormal/emergency/crisis situations.

  Normative and descriptive Normative decision theory is concerned with identification of optimal decisions where optimality is often determined by considering an ideal decision maker who is able to calculate with perfect accuracy and is in some sense fully rational. The practical application of this prescriptive approach (how people  ought to  make decisions) is called decision analysis and is aimed at finding tools, methodologies, and software ( decision support system) to help people make better decisions. In contrast, Positive or descriptive decision theory is concerned with describing observed behaviors often under the assumption that the decision-making agents are behaving under some consistent rules. These rules may, for instance, have a procedural framework  elimination by aspects model or an axoimatic framework (e.g. stochastic transitive axioms), reconciling the Von-neumann morgenstran axioms with behav...

  Decision theory Jump to navigation Jump to search Decision theory   is the study of an agents  choices. Decision theory can be broken into two branches: nominative  decision theory, which analyzes the outcomes of decisions or determines the optimal   decisions  given constraints and assumptions, and descriptive decision theory, which analyzes    how  agents actually make the decisions they do. Decision theory is closely related to the field of  game theory and is an interdisciplinary topic, studied by economists, statisticians, data scientists, psychologists, biologists, .  political and other social scientists, philosophers   and computer scientists. Empirical applications of this rich theory are usually done with the help of statistical and econometric methods.

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