An optimal decision is a decision such that no other available decision options will lead to a better outcome. It is an important concept in decision theory. In order to compare the different decision outcomes, one commonly assigns a relative utility to each of them. If there is uncertainty in what the outcome will be, […]

# Category: Decision theory

## Expected utility hypothesis

In economics, game theory, and decision theory the expected utility hypothesis is a hypothesis concerning people’s preferences with regard to choices that have uncertain outcomes (gambles). This hypothesis states that if specific axioms are satisfied, the subjective value associated with an individual’s gamble is the statistical expectation of that individual’s valuations of the outcomes of […]

## Heuristics in Decision Theory

One method of decision-making is heuristic. The heuristic approach makes decisions based on routine thinking. While this is quicker than step-by-step processing, heuristic decision-making opens the risk of inaccuracy. Mistakes that otherwise would have been avoided in step-by-step processing can be made. One common and incorrect thought process that results from heuristic thinking is the […]

## 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 may be limited in resources or are boundedly rational. In such cases the issue is not the deviation between real and optimal behaviour, but […]

## Other-regarding preferences (social preferences)

Also called social preferences. In decisions which affect others, people will sometimes give up some direct personal benefit or take on a cost in order to achieve a fair or equal outcome. Bolton and Ockenfels (2000) and Fehr and Schmidt (1999) explore decision-makers who are concerned with fairness of distributions and have disutility from others’ […]

## 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 […]

## Intertemporal Choice

Intertemporal choice is concerned with the kind of choice where different actions lead to outcomes that are realized at different points in time. 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 […]

## Choice Under Uncertainty (Expected Value)

This area represents the heart of decision theory. The procedure now referred to as expected value was known from the 17th century. Blaise Pascal invoked it in his famous wager (see below), which is contained in his Pensées, published in 1670. The idea of expected value is that, when faced with a number of actions, […]

## Loss aversion

In economics and decision theory, loss aversion refers to people’s tendency to strongly prefer avoiding losses to acquiring gains. Some studies suggest that losses are twice as powerful, psychologically, as gains. Loss aversion was first demonstrated by Amos Tversky and Daniel Kahneman. This leads to risk aversion when people evaluate an outcome comprising similar gains and […]

## Decision theory: Definition

Decision theory in economics, psychology, philosophy, mathematics, and statistics is concerned with identifying the values, uncertainties and other issues relevant in a given decision, its rationality, and the resulting optimal decision. It is closely related to the field of game theory as to interactions of agents with at least partially conflicting interests whose decisions affect […]