Decision theory

Despite this, the field is important to the study of real human behavior by social scientists, as it lays the foundations to mathematically model and analyze individuals in fields such as sociology, economics, criminology, cognitive science, moral philosophy and political science.

These rules may, for instance, have a procedural framework (e.g. Amos Tversky's elimination by aspects model) or an axiomatic framework (e.g. stochastic transitivity axioms), reconciling the Von Neumann-Morgenstern axioms with behavioral violations of the expected utility hypothesis, or they may explicitly give a functional form for time-inconsistent utility functions (e.g. Laibson's quasi-hyperbolic discounting).

In recent decades, there has also been increasing interest in "behavioral decision theory", contributing to a re-evaluation of what useful decision-making requires.

Known from the 17th century (Blaise Pascal invoked it in his famous wager, which is contained in his Pensées, published in 1670), the idea of expected value is that, when faced with a number of actions, each of which could give rise to more than one possible outcome with different probabilities, the rational procedure is to identify all possible outcomes, determine their values (positive or negative) and the probabilities that will result from each course of action, and multiply the two to give an "expected value", or the average expectation for an outcome; the action to be chosen should be the one that gives rise to the highest total expected value.

He gives an example in which a Dutch merchant is trying to decide whether to insure a cargo being sent from Amsterdam to St. Petersburg in winter.

[7] In the 20th century, interest was reignited by Abraham Wald's 1939 paper pointing out that the two central procedures of sampling-distribution-based statistical-theory, namely hypothesis testing and parameter estimation, are special cases of the general decision problem.

[11] The prospect theory of Daniel Kahneman and Amos Tversky renewed the empirical study of economic behavior with less emphasis on rationality presuppositions.

[13] It is also described as cost-benefit decision making since it involves the choices between rewards that vary according to magnitude and time of arrival.

In the emerging field of socio-cognitive engineering, the research is especially focused on the different types of distributed decision-making in human organizations, in normal and abnormal/emergency/crisis situations.

In the 18th century, Daniel Bernoulli introduced the concept of "expected utility" in the context of gambling, which was later formalized by John von Neumann and Oskar Morgenstern in the 1940s.

By the late 20th century, scholars like Daniel Kahneman and Amos Tversky challenged the assumptions of rational decision-making.