Decision Theory
What is Decision Theory?
Decision theory is a multidisciplinary field in behavioral science that explores how individuals and organizations make choices, particularly in uncertain or complex situations. There are two main branches: normative decision theory, which prescribes how decisions should ideally be made to maximize rationality and utility, and descriptive decision theory, which studies how decisions are actually made, accounting for biases, emotions, and cognitive limitations. Decision theory is applied in areas like economics, healthcare, and artificial intelligence to improve decision-making frameworks by balancing rational models with insights from real-world behavior.
The Basic Idea
When the holiday season comes around, a slew of incredibly important decisions come with it... like choosing which type of cookies to buy. You might find yourself standing in the grocery store, debating between two options: one cookie is less expensive, healthier, and you know it’s a fan favorite. But the other one is your favorite. It just wouldn’t feel like the holiday season without this admittedly very average cookie, though you know there could be better options out there. So, you decide to go with the classic choice and think to yourself that maybe next year you’ll finally switch it up.
Even with an example as simple as holiday shopping choices, it’s clear that the study of human decision-making can be quite complicated. Decision theory is a cross-disciplinary field that examines how individuals, groups, and systems make choices under conditions of uncertainty or complexity. The theory draws on research from psychology, economics, statistics, and neuroscience to understand and model how decisions are made, and is divided into two primary branches: normative and descriptive decision theory.
Normative decision theory focuses on how decisions should be made according to rational criteria, typically under assumptions of perfect information and utility maximization. The objective, then, is to model the ideal decision process. For example, expected utility theory is a foundational model in normative decision-making that suggests that people should make choices that maximize their expected utility by weighing the likelihood of various outcomes against their respective benefits.
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In contrast, descriptive decision theory explores how decisions are actually made, proving that human behavior often diverges from normative standards due to cognitive limitations, biases, emotions, and heuristics (mental shortcuts). For example, prospect theory, developed by Daniel Kahneman and Amos Tversky, describes how people are more sensitive to losses than gains, revealing that our decisions are influenced by more than just pure probabilities, but also by our subjective feelings about their potential outcomes.1
"The researcher hoping to break new ground in the theory of experimental design should involve himself in the design of actual experiments. The investigator who hopes to revolutionize decision theory should observe and take part in the making of important decisions."
— George E. P. Box, Science and Statistics (1976)
About the Author
Annika Steele
Annika completed her Masters at the London School of Economics in an interdisciplinary program combining behavioral science, behavioral economics, social psychology, and sustainability. Professionally, she’s applied data-driven insights in project management, consulting, data analytics, and policy proposal. Passionate about the power of psychology to influence an array of social systems, her research has looked at reproductive health, animal welfare, and perfectionism in female distance runners.
