Decision Theory - Normative and Descriptive Decision Theory

Normative and Descriptive Decision Theory

Most of decision theory is normative or prescriptive, i.e., it is concerned with identifying the best decision to take (in practice, there are situations in which "best" is not necessarily the maximal, optimum may also include values in addition to maximum, but within a specific or approximative range), assuming an ideal decision maker who is fully informed, able to compute with perfect accuracy, and fully rational. The practical application of this prescriptive approach (how people ought to make decisions) is called decision analysis, and aimed at finding tools, methodologies and software to help people make better decisions. The most systematic and comprehensive software tools developed in this way are called decision support systems.

Since people usually do not behave in ways consistent with axiomatic rules, often their own, leading to violations of optimality, there is a related area of study, called a positive or descriptive discipline, attempting to describe what people will actually do. Since the normative, optimal decision often creates hypotheses for testing against actual behaviour, the two fields are closely linked. Furthermore it is possible to relax the assumptions of perfect information, rationality and so forth in various ways, and produce a series of different prescriptions or predictions about behaviour, allowing for further tests of the kind of decision-making that occurs in practice.

In recent decades, there has been increasing interest in what is sometimes called 'behavioral decision theory' and this has contributed to a re-evaluation of what rational decision-making requires (see for instance Anand, 1993).