Closely related to the field of game theory, decision theory is concerned with the choices of individual agents whereas game theory is concerned with interactions making hard decisions clemen pdf agents whose decisions affect each other. Decision theory is an interdisciplinary topic, studied by economists, statisticians, psychologists, biologists, political and other social scientists, philosophers, and computer scientists.
Empirical applications of this rich theory are usually done with the help of statistical and econometric methods, especially via the so-called choice models, such as probit and logit models. Estimation of such models is usually done via parametric, semi-parametric and non-parametric maximum likelihood methods. What kinds of decisions need a theory? Normative or prescriptive decision theory is concerned with identifying the best decision to make, modelling an ideal decision maker who is able to compute with perfect accuracy and is fully rational.
In contrast, positive or descriptive decision theory is concerned with describing observed behaviors under the assumption that the decision-making agents are behaving under some consistent rules. The prescriptions or predictions about behaviour that positive decision theory produces allow for further tests of the kind of decision-making that occurs in practice. There is a thriving dialogue with experimental economics, which uses laboratory and field experiments to evaluate and inform theory. In recent decades, there has also been increasing interest in what is sometimes called “behavioral decision theory” and this has contributed to a re-evaluation of what rational decision-making requires.
What kinds of decisions need a theory? For more details on this topic, see Expected utility hypothesis. The area of choice under uncertainty represents the heart of decision theory.