Question

Are rational choice theory and decision theory good normative theories of decision making? That is are they useful tools for making better decisions? What kinds of problems can we solve with decision theory? What kinds of problems can it not help us solve? Give examples and explain your reasoning

Answer 1

Rational choice theory is used for modelling social and economic behaviour. It is based on the fact that individuals try to attain utility maximization. This theory is used to model human decision making, where choices are made according to personal preference. It favours logic, objectivity and analysis. This theory is a useful tool to make better decisions on individual level as individuals make prudent and logical decisions.

Decision theory is a mathematical study of strategies for optimal decision making between different risks or expectations of gain or loss depending on the outcome. Normative decision theory tries to give advice on how to make the best decisions when there are a set of uncertain beliefs and a set of values. This theory is used to make better decisions by considering an ideal decision maker who is able to compute with accuracy and is fully rational. Decision analysis is one of the practical applications to help people make better decisions.

Normative decision theory can help solve the problems of choice under uncertainty where the highest expected value is selected. It is also used to solve intertemporal choice where different actions lead to different outcomes, such as people deciding to invest or spend on a holiday. It can also be applied in complex decision making process where individuals making decisions may be limited in resources.

Normative decision theory cannot help us solve decisions which are based on interaction between several decision makers, as several viewpoints have to be taken into consideration, wherein game theory is used where there are several players.