Decision Theory Glossary

A possible choice available to the decision-maker in a decision problem.

A decision problem demonstrating systematic violations of the independence axiom of expected utility theory.

The preference for known risks over unknown risks, even when expected values are equivalent.

A method for solving decision trees by starting at terminal nodes and working backward to determine optimal choices.

Revising probabilities in light of new evidence using Bayes' theorem: P(H|E) = P(E|H)P(H)/P(E).

The concept that rationality is limited by cognitive capacity, available information, and time constraints.

A framework recommending actions based on their causal effects on outcomes rather than their evidential correlation.

An axiom requiring that for any two options, the decision-maker can either prefer one or be indifferent between them.

A table listing actions as rows, states of the world as columns, and payoffs in each cell.

A graphical tool mapping sequential decisions, chance events, and payoffs as branching paths.

An action dominates another if it is at least as good in every state and strictly better in at least one.

A thought experiment revealing ambiguity aversion and violations of subjective expected utility theory.

The probability-weighted average of utilities across all possible outcomes of an action.

The probability-weighted average of monetary or numerical payoffs across all possible outcomes.

Preferences between two lotteries are unaffected when both are mixed with a common third lottery.

Uncertainty in Frank Knight's sense: situations where probabilities cannot be meaningfully assigned to outcomes.

A decision rule selecting the action that maximizes the minimum (worst-case) payoff.

A decision rule selecting the action that minimizes the maximum possible regret across all states.

A theory prescribing how decisions should be made under ideal rationality.

The outcome value (utility or monetary amount) resulting from a given action in a given state of the world.

A descriptive theory of decision-making under risk, featuring reference dependence, loss aversion, and probability weighting.

Choosing the first option that meets a minimum acceptability threshold rather than seeking the optimal one.

A possible way the world might be, determining which outcome results from a given action.

If A is preferred to B and B is preferred to C, then A must be preferred to C.

A mathematical function assigning numerical values to outcomes that represent a decision-maker's preferences.