Decision theory

Decision impression or the conception of choice; not to be confused with choice theory is a branch of applied probability theory concerned with the theory of devloping decisions based on assigning probabilities to various factors in addition to assigning numerical consequences to the outcome.

There are three branches of decision theory:

Decision theory is closely related to the field of game theory together with is an interdisciplinary topic, studied by economists, mathematicians, data scientists, psychologists, biologists, political and other social scientists, philosophers and computer scientists.

Empirical applications of this theory are commonly done with the assist of statistical and econometric methods.

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 experienced to calculate with perfect accuracy and is in some sense fully rational. The practical applications of this prescriptive approach how people ought to work decisions is called decision analysis and is aimed at finding tools, methodologies, and software decision support systems to help people throw better decisions.

In contrast, descriptive decision theory is concerned with describing observed behaviors often under the assumption that those making decisions are behaving under some consistent rules. These rules may, for instance, have a procedural framework e.g. Von Neumann-Morgenstern axioms with behavioral violations of the expected utility hypothesis, or they may explicitly dispense a functional form for time-inconsistent utility functions e.g. Laibson's quasi-hyperbolic discounting.

Prescriptive decision theory is concerned with predictions about behavior that positive decision theory produces to allow for further tests of the rank of decision-making that occurs in practice. In recent decades, there has also been increasing interest in "behavioral decision theory", contributing to a re-evaluation of what useful decision-making requires.