Decision Theory of Management

What is Decision Theory?

According to the theory of corporate social responsibility any decision by the management, Decision theory investigates the problem of making decisions in the face of uncertainty. It is a branch of mathematical economics and statistics that grew out of the earlier field of game theory. Decision theory finds application in fields as diverse as industrial design, manufacturing management, and economics. The logic behind the decision theory is that the real world is a complex system of interactions. At every point in time, there are interactions and a decision has to be made regarding what action to take. In such a system of interacting entities, the decision maker needs to make a decision based on his current knowledge, current reality and present constraints.

How do people make decisions?

According to the wise ancient Greek philosopher, Socrates, the crucial element is a sense of probabilism, which many mistakenly equate with risk aversion. This misunderstanding of what we mean by probabilism explains why people make different decisions from situation to situation. There are certain combinations of parameters (either specific features of our environment or general probabilities) which cause us to favor one decision or another. In the market economy, for example, we prefer risk-free currency but the risk-free currency of one country becomes riskier than the risk-free currency of another country because we judge the latter more likely to be targeted by a dictator than the former.

Statistical Decision Theory

The oldest, and still most widely used, statistical method is called graphical sample testing. We may define the elements of a sample as the set { A , B , C } such that A = { 1 , 0 , 1 } . A is drawn from a set S and B is drawn from a set T. Given a problem, what should be considered when evaluating the choice C (between A and B) and determining its level of risk? The difficulty arises from two sources. One is the mutual exclusion hypothesis. The other is the Hamiltonian approximation. To prove that each element in S is as likely as the element in T, one must compare each element to the corresponding element in T. But if one is drawn from S, then what in the set S is drawn from T? This means that the difference in the probabilities in a sample is not represented.

Applications of Decision Theory

Decision theory extends to other disciplines in psychology and management such as business and marketing decision making. Classes in Decision Theory A decision theory class is taught by University of Virginia Professor Michael Hacker who has been an adviser to psychologists, economists, and statisticians. Analytical Decision Making Despite its lack of theoretical underpinnings, analytical decision making remains a widely accepted area of statistical and decision theory. How to Score in Decision Theory How to Assess Decision Theory (Introduction to Decision Theory) 3 Strategies to Evaluate Decision Theory (Probabilistic Decision Theory) What’s Your Decision Theory Style?

Conclusion

Welcome to the second edition of Computational Finance. After you read the first edition, you probably remember the two great books: Impact of complex information on financial decision making (Eric J. Wang) Financial Theory and Algorithms (Lance Fortnow) These books were both written by statisticians working in the financial industry. They tackle the theory and the applications of financial decision making. This edition focuses on decision theory. In it, we are going to study probability and the matrix language that underpins decision theory. The purpose of this book is to give you a deep understanding of probability theory and how it can be applied in the financial world. Let's begin!