Decision Theory

Decision theory attempts both to describe how an individual makes a decision (descriptive approach) and to provide tools for optimal decision-making (normative approach). In all cases, it is concerned with an ideal decision-maker capable of coldly analyzing all alternatives with infinite computing power, and deciding on a rational basis. However, the term rationality has many meanings, and its use has evolved over the decades. At this stage, we will retain that the decision-maker is assumed to have preferences – in a sense that we will specify – and that his decisions are taken in coherence with these preferences. The description of these preferences, the axiomatics underlying the decision and the properties of the optimal decision depend essentially on the object and context of the decision: is the object static or intertemporal, certain or risky, and is the decision static (taken once and for all) or dynamic and likely to be updated. This typology will structure our presentation.