normative decision theory

Neumann & Morgenstern (1947) - decision matrix

quantifying decisions based on axioms (rules) - includes riskless and risky decisions - then determines actual rational choice

what does the decision matrix assume

individuals are perfectly informed, they have stable values, they have unlimited thinking abilities

what is invariance

underlying structure is vital - same questions asked in different ways should yield same answer

what is independence of utility and probability

how important an event is to you should not influence your judgement of how likely it is

change vs status quo

if opportunity works, can improve life, if not, worse life. - know your future if stick to status quo

what is normative theory

ignores complexity and assumes simple orderliness, simpler but less realism, concrete method for making decisions, allows more precise predictions

what is descriptive theory

more realism, but more complex, captures more of what is going on, less concrete help for decision makers, harder to make predictions

what is expected utility

the average satisfaction placed on outcomes by individuals = choose the option with highest expected benefit - subjective worth

what is expected value

average numerical payoff - choose the option with the highest expected financial outcomes