The study of a person or agents’ choices
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What is Decision Theory?
Decision theory is the study of a person or agents’ choices. The theory helps us understand the logic behind the choices professionals, consumers, or even voters make.
The choices come with consequences and are usually discussed in two separate but distinct branches. The branches consist of Normative Decision Theory and Optimal Decision Theory.
When analyzing decision theory, the analysis often consists of what makes an optimal decision, who that optimal decision-maker may be, and how they can come to that decision. Discussing how people “ought” to make decisions in certain scenarios is part of this study as well.
We will discuss how the two fields differ and how decision theory plays a part in our everyday lives in many different facets. The field of decision theory is often studied in business schools, with appearances in the field of economics and statistics. It can also be found in the scientific realm, with biologists and political scientists studying it as well.
Summary
- Decision theory is the study of a person or agents’ choices. It helps us understand the choices professionals, consumers, or even voters make when coming to a decision.
- There are two branches of decision theory – Normative Decision Theory and Optimal Decision Theory.
- There are three different types of uncertainty that can be found in decision-making theory –States, Consequences, and Actions.
- Understanding how decision theory works and its implications for consumer behavior is an excellent tool for marketers to utilize.
Normative and Optimal Decision Theory Analyses
Decision theory is divided into two different subcategories. The table below discusses and outlines some of the critical differences between the two, and the respective areas they focus on:
| Normative Decision Theory | Optimal Decision Theory |
|---|
| Analyzes the outcomes of decisions | The investigation and analysis of why individuals and agents of choice make the decisions that they do |
| Determines the optimal decision based on outcomes | Looks at the assumptions made by individuals making the decisions and the assumptions they make when deciding |
| The theory centers around the ideal decision-maker for a specific situation | |
| "What should the person making the decision do to make this decision?" | |
Attempting to Predict Consumer Behavior
Understanding how decision theory works and its implications for consumer behavior is an excellent tool for marketers to utilize. Understanding decision theory can help when making predictive models for which item a consumer may choose or even which type of transportation they may utilize. It can help in understanding alternatives an individual may choose and why they may choose them.
Understanding consumer behavior can be pivotal in determining whether a product will be a success. After all, creating a quality product is not necessarily indicative of whether or not people will buy it and whether a company will be able to recover the investment made in R&D and marketing they put forth trying to sell it.
The Uncertainty Variable in Decision Theory
Different uncertainty variables are a part of the decision-making theory. Former university professor Leonard Jimmie Savage, the author of “The Foundations of Statistics,” outlined the different conditions of uncertainty that exist in modern-day decision-making theory.
Three different types of uncertainty can be found in decision-making theory – States, Consequences, and Actions.
States encompass facts that exist in the universe that can affect a decision. Consequences are the features of a decision made that influence a decision-maker on a micro-level, i.e., whether an individual feels rested. Actions are the link/bridge between both states and consequences. Savage describes them as links between states and consequences.
Related Readings
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FAQs
The underlying tenet is that if you have to choose among 100 possibilities, you should sample the first 37 and ignore (or postpone) the rest. The 37% rule is not some automated, unthinking process. It's a phase of calibration where you figure out what works and what doesn't.
What is the good enough decision-making model? ›
Bounded Rationality: Making “Good Enough” Decisions
According to this model, individuals knowingly limit their options to a manageable set and choose the first acceptable alternative without conducting an exhaustive search for alternatives.
Is there no right or wrong answer on ethical decision-making? ›
Ethical decision-making doesn't come with right or wrong answers—it's a continuous learning process. “There often is no right answer, only imperfect solutions to difficult problems,” Hsieh says.
How do you solve decision theory? ›
Decision-making and Problem-solving
- Develop evidence to support views.
- Analyze situations carefully.
- Discuss subjects in an organized way.
- Predict the consequences of actions.
- Weigh alternatives.
- Generate and organize ideas.
- Form and apply concepts.
- Design systematic plans of action.
Key points. About 80 percent of married men surveyed agreed with the statement that they decided to get married because it was the right time to settle down. The median age for men to first marry is 27. Thirty-five percent of married men disagreed that they got married primarily because they were ready to have children ...
What is the 37 rule optimal stopping? ›
Here it is in a nutshell: Spend the first 37 percent of your decision-making process gathering information and committing to nothing. After that period, choose the next option that comes along that's better than everything you've seen before.
What is the optimal decision rule? ›
To make an optimal decision, economists ask: “What are the extra (marginal) costs and what are the extra (marginal) benefits associated with the decision?” If the extra benefits are bigger than the extra costs, you shall go ahead with the decision, namely the decision is good.
What is the optimal decision rule in decision theory? ›
As mentioned earlier, an optimal decision rule, defined as a rule that maximizes PC, consists in selecting the response alternative that is the most likely a posteriori, given the observations.
What are the 5 parts of the great decision-making model? ›
Decision-Making Models
- Define the problem.
- Identify the criteria you will use to judge possible solutions.
- Decide how important each criterion is.
- Generate a list of possible alternatives.
- Evaluate those alternatives.
- Determine the best solution.
There are different ways to approach decision making by considering four key elements, or rules: the utilitarian rule, moral rights, justice rule, and practical rule. Following the utilitarian rule, you're making decisions that will have the largest positive impact on stakeholders.
Ethical decision-making process:
- Look for and identify ethical issues. ...
- Obtain unbiased facts and look for distorted or missing information.
- Identify the stakeholders and their motivation and influence. ...
- Identify the values and look for competing values.
- Seek additional assistance and foster open discussion.
Ethical decision-making is based on core character values like trustworthiness, respect, responsibility, fairness, caring, and good citizenship. Ethical decisions generate ethical behaviors and provide a foundation for good business practices. See a model for making ethical decisions.
What are the key issues in decision theory? ›
Key Issues Explored
- Marginal Analysis. One of the fundamental concepts in decision theory is marginal analysis. ...
- Decision Tree Approach. The decision tree approach is a powerful tool that visually represents decision scenarios and their potential outcomes. ...
- Preference Theory. ...
- Other Approaches for Decision.
Decision theory is the study of how decisions are made by individuals and within groups. Understanding how decisions are made is important to many professional fields such as mathematics, statistical analysis, psychology, philosophy, scientific research, politics, economics, and marketing.
What is an example of decision theory? ›
Decision theory is concerned with the reasoning underlying an agent's choices, whether this is a mundane choice between taking the bus or getting a taxi, or a more far-reaching choice about whether to pursue a demanding political career.
Where does the 37% rule come from? ›
What is the 37% rule? The 37% rule comes from optimal stopping theory in mathematics, which determines the optimal time to take a particular action in order to maximize reward and minimize cost (aka, the best time to stop seeking more options and pull the trigger).
What is the optimal stopping problem? ›
The theory of optimal stopping is concerned with the problem of choosing a time to take a given action based on sequentially observed random variables in order to maximize an expected payoff or to minimize an expected cost.
