Decision making
The making of decisions is studied by a discipline called decision theory. Its objective is to learn how decisions are made and how they ought to be made. There are correspondingly two branches: descriptive, which describes how people actually choose among various options, and normative (or prescriptive), which deals with the use of reason in decision making.
Descriptive decision theory uses empirical methods and is of interest to psychologists, economists, politicians, and business people. Prescriptive decision theory, as a theoretical discipline that uses deductive methods, is mainly of interest to mathematicians, logicians, and statisticians.
Decision making problems can vary from the case of a single individual having to face a single choice to a complex society where many individuals with conflicting goals have to make many decisions. Two broad fields can be distinguished: decision making under certainty means that the outcome of each choice is certain; decision making under uncertainty means that the probability of each outcome is unknown.
When making a decision under certainty, the major problem is to determine which is the trade-off among different objectives. Cost-benefit analysis can be used to this purpose. In decision making under uncertainty a matrix is laid where rows represent choices and columns represent states of nature. States of nature determine the consequences of a choice, and they should be exclusive and exhaustive. The average return when an alternative is chosen many times is called the expected value of the alternative.
Games are an example of decision making under risk, where, even if the outcomes are not certain, their probability is known. It has been shown that in the case of games where the probability of winning is 50%, and the stakes are high, people usually refuse to participate. To explain this attitude, the concept of expected utility was devised, which takes into account that the desire to avoid the loss is more important than the benefit of the potential gain.
Expected utility turned to be more useful as a theoretical tool than a descriptive one. In reality, people's behavior cannot be fully explained under this theory because people actually tend to eliminate options which are improbable and to overweight choices of which the outcome is obtained with certainty. However, the expected utility principle was provided with a philosophical and axiomatic basis by the utility theory developed by John von Neuman and Oskar Morgestern.
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