Decision Theory

AAA

DEFINITION of 'Decision Theory '

An interdisciplinary approach to determine how decisions are made given unknown variables and an uncertain decision environment framework. Decision theory bring together psychology, statistics, philosophy and mathematics to analyze the decision-making process. Decision theory is applied to a wide variety of areas such as game theory, auctions, evolution and marketing.

INVESTOPEDIA EXPLAINS 'Decision Theory '

A common example of decision theory stems from the prisoner's dilemma in which two individuals are faced with an uncertain decision where the final outcome is not only based on their personal decision, but also on that of the other individual. Since both parties do not know what actions the other person will take, this results in an uncertain decision framework.
While mathematics and statistical models determine what the optimal decision should be, psychology and philosophy introduce factors of human behaviors to suggest the most likely outcome.

RELATED TERMS
  1. John F. Nash Jr.

    An American mathematician who won the 1994 Nobel Memorial Prize ...
  2. John Harsanyi

    An economist who won the Nobel Memorial Prize in 1994 along with ...
  3. Trembling Hand Perfect Equilibrium

    In game theory, an equilibrium state that takes into consideration ...
  4. Prisoner's Dilemma

    A paradox in decision analysis in which two individuals acting ...
  5. Game Theory

    A model of optimality taking into consideration not only benefits ...
  6. Nash Equilibrium

    A concept of game theory where the optimal outcome of a game ...
Related Articles
  1. Retirement

    This Is Your Brain On Stocks

    Find out how the human mind can hurt investors' portfolios.
  2. Trading Strategies

    How To Avoid Emotional Investing

    Most investors buy high and sell low, but you can avoid this trap by using some simple strategies.
  3. Active Trading Fundamentals

    Leading Indicators Of Behavioral Finance

    Discover how put-call ratios and moving averages can be used to analyze investor behavior.
  4. Active Trading Fundamentals

    Behavioral Finance

    Learn the science behind irrational decision making and how you can avoid it.
  5. Trading Strategies

    How effective is creating trade entries after spotting an Exhaustion Gap pattern?

    Understand the components of the exhaustion gap pattern, how and why it occurs, and how it can be used to create an effective trading strategy.
  6. Chart Advisor

    Is It A Breakout? See The Point-And-Figure Chart

    These stocks have broken out of a triple top formation using point-and-figure charting, a bullish sign.
  7. Chart Advisor

    A Multi-Asset Income ETF For Defensive Investors

    In light of market volatility and worries that stocks are overbought, one product worth noting is the Guggenheim Multi-Asset Income ETF.
  8. Chart Advisor

    These Stocks Offer Range-Trading Opportunities

    These stocks are trading in ranges (or were recently) and present opportunities to buy at support or short sell at resistance.
  9. Economics

    How A Limited Government Affects A Country's Finances

    Countries with limited governments have fewer laws about what individuals and businesses can and can’t do. What's the net result?
  10. Investing has its ups and downs, but financial advisers can do much to prepare their clients and their clients' portfolios for such volatility.
    Investing Basics

    How Advisors Can Help Clients Stomach Volatility

    Investing has its ups and downs, but financial advisers can do much to prepare their clients and their clients' portfolios for such volatility.

You May Also Like

Hot Definitions
  1. Christmas Island Dollar

    The former currency of Christmas Island, an Australian island in the Indian Ocean that was discovered on December 25, 1643. ...
  2. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
  3. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  4. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  5. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  6. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
Trading Center