BUS 221 Chapter Notes - Chapter 7-8: Decision Theory, Rationality
12 Jul 2016
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Document Summary
Decision theory is the study of rational decision-making. Rationality is just the ability, and the tendency, to choose among options in a way that aims at maximizing achievement of the agent"s goals. Expected value: expected value of an option (such as the option to buy a lottery ticket) is the sum of the value of each possible outcome, multiplied by the probability of that outcome. Probability of various outcomes: expressing how likely an outcome is, typically expressed in terms of long-term frequency. Outcomes: what would result for the chooser, if she does a particular act and a particular state. Expected v/u = (0. 000001 x ,995) + (0. 999999 x -5) = sh. 999995 - 4. 999995 = -. 999955. Expected utility: attempts to calculate how much utility (often thought of in terms of usefulness or happiness) we get out of something, often by comparing it to something else. Has no natural unit of measure, thus use a scale (0-10) to rate the personal utility.
