Definition:Decision Theory
Definition
Decision theory is the study of the reasoning underlying an agent's choices.
It provides a framework for making decisions in the presence of uncertainty.
Examples
Two-Player Game
Consider a two-player game with an entrepreneur as one player and the competition (for example: the world, the environment, or a market) as the other player.
The entrepreneur may adopt any of a finite number of strategies, but knows only the probabilities that the competition will adopt each of its own strategies.
The payoff matrix gives the consequences (either gain or loss) to the entrepreneur for each action made, correlated with each action made by the competition.
Hence, knowing or estimating the probability of choosing a particular action made by the competition, the entrepreneur may calculate the expected payoff from a particular action.
Also known as
Decision theory is also known as the theory of choice.
Also see
- Results about decision theory can be found here.
Sources
- 1991: Roger B. Myerson: Game Theory ... (previous) ... (next): $1.2$ Basic Concepts of Decision Theory
- 1998: David Nelson: The Penguin Dictionary of Mathematics (2nd ed.) ... (previous) ... (next): decision theory
- 2008: David Nelson: The Penguin Dictionary of Mathematics (4th ed.) ... (previous) ... (next): decision theory