Decision Theory


Decision theory gives an account of decision-making. It has a descriptive branch that explains how people make decisions and a normative branch that explains how people should make decisions to be rational. Many psychologists and economists formulate descriptive accounts of decision-making, whereas many philosophers and financial analysts formulate normative accounts of decision-making. The descriptive and normative branches are related because people want to make rational decisions, and so a normative account of decision-making offers a first approximation to a descriptive account of decision-making. This entry focuses on normative accounts of decision-making. It examines the most well-established principle of rational choice, namely, the principle to maximize expected utility. Then, it considers refinements and extensions of the principle. The refinements treat decision problems with unstable expected utilities, as may arise in games of strategy. The extensions evaluate for rationality the acts of collective agents, that is, groups of people. Decision theory contributes to the foundations of the behavioral sciences because it studies the behavior of people when their minds direct their behavior. It contributes to the social sciences because the behavior of people produces the acts of governments and societies.

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