decision theory


decision theory

In statistics and related subfields of philosophy, the theory and method of formulating and solving general decision problems. Such a problem is specified by a set of possible states of the environment or possible initial conditions; a set of available experiments and a set of possible outcomes for each experiment, giving information about the state of affairs preparatory to making a decision; a set of available acts depending on the experiments made and their consequences; and a set of possible consequences of the acts, in which each possible act assigns to each possible initial state some particular consequence. The problem is dealt with by assessing probabilities of consequences conditional on different choices of experiments and acts and by assigning a utility function to the set of consequences according to some scheme of value or preference of the decision maker. An optimal solution consists of an optimal decision function, which assigns to each possible experiment an optimal act that maximizes the utility, or value, and a choice of an optimal experiment. See also cost-benefit analysis, game theory.

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