Decision theory

Decision theory is an interdisciplinary area of study, related to and of interest to practitioners in mathematics, statistics, economics, philosophy, management and psychology. It is concerned with how real decision-makers make decisions, and with how optimal decisions can be reached.

Normative and descriptive decision theory

Most of decision theory is normative or prescriptive, i.e. it is concerned with identifying the best decision to take, assuming an ideal decision taker who is fully informed, able to compute with perfect accuracy, and fully rational. The practical application of this prescriptive approach (how people should make decisions) is called decision analysis, and aimed at finding tools, methodologies and software to help people make better decisions. The most systematic and comprehensive software tools developed in this way are called decision support systems.

Related Topics:
Decision analysis - Decision support system

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Since it is obvious that people do not typically behave in optimal ways, there is also a related area of study, which is a positive or descriptive discipline, attempting to describe what people will actually do. Since the normative, optimal decision often creates hypotheses for testing against actual behaviour, the two fields are closely linked. Furthermore it is possible to relax the assumptions of perfect information, rationality and so forth in various ways, and produce a series of different prescriptions or predictions about behaviour, allowing for further tests of the kind of decision-making that occurs in practice.

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