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. This Is Your Brain On Stocks
    Retirement

    This Is Your Brain On Stocks

  2. How To Avoid Emotional Investing
    Trading Strategies

    How To Avoid Emotional Investing

  3. Leading Indicators Of Behavioral Finance
    Active Trading Fundamentals

    Leading Indicators Of Behavioral Finance

  4. Behavioral Finance
    Active Trading Fundamentals

    Behavioral Finance

comments powered by Disqus
Hot Definitions
  1. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  2. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  3. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  4. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  5. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
  6. Limit-On-Open Order - LOO

    A type of limit order to buy or sell shares at the market open if the market price meets the limit condition. This type of ...
Trading Center