What is Decision Theory?
Decision Theory is a study of choices. It's a framework for making logical and informed decisions in uncertain conditions. It encompasses both normative and descriptive approaches, guiding real-world and ideal decision-making processes.
Normative vs Descriptive
Normative decision theory outlines how decisions should be made logically, while descriptive theory explains how decisions are actually made, often including cognitive biases and social influences that can lead to suboptimal choices.
Expected Utility Hypothesis
A cornerstone of decision theory is the Expected Utility Hypothesis, which states that individuals choose the option with the highest expected utility, balancing rewards and the probability of outcomes.
Game Theory Interaction
Game Theory, a subset of Decision Theory, examines decisions in scenarios where outcomes depend on actions of multiple agents. It's crucial in economics and politics, predicting strategic interactions like auctions and voting.
Heuristics and Biases
Research by Tversky and Kahneman revealed systematic deviations from rationality. Heuristics are mental shortcuts we use to make decisions quickly, but they can lead to predictable biases and errors in judgment.
Beyond Human Rationality
Decision theory also recognizes bounded rationality, where decision-making is limited by cognitive limitations and time constraints. This concept challenges the assumption that humans always make perfectly logical decisions.
Real-World Applications
Decision theory is applied in diverse fields, from AI to environmental policy. In medicine, it aids in weighing treatment options versus potential outcomes, while in finance, it underpins risk assessment and investment strategies.
What does Decision Theory primarily study?
Economic market trends
Choices under uncertainty
Biological evolution patterns
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