Decision theoryDecision theory (or the theory of choice; not to be confused with choice theory) is a branch of applied probability theory and analytic philosophy concerned with the theory of making decisions based on assigning probabilities to various factors and assigning numerical consequences to the outcome. There are three branches of decision theory: Normative decision theory: Concerned with the identification of optimal decisions, where optimality is often determined by considering an ideal decision-maker who is able to calculate with perfect accuracy and is in some sense fully rational.
Risk aversionIn economics and finance, risk aversion is the tendency of people to prefer outcomes with low uncertainty to those outcomes with high uncertainty, even if the average outcome of the latter is equal to or higher in monetary value than the more certain outcome. Risk aversion explains the inclination to agree to a situation with a more predictable, but possibly lower payoff, rather than another situation with a highly unpredictable, but possibly higher payoff.
Decision-makingIn psychology, decision-making (also spelled decision making and decisionmaking) is regarded as the cognitive process resulting in the selection of a belief or a course of action among several possible alternative options. It could be either rational or irrational. The decision-making process is a reasoning process based on assumptions of values, preferences and beliefs of the decision-maker. Every decision-making process produces a final choice, which may or may not prompt action.
Rational choice theoryRational choice theory refers to a set of guidelines that help understand economic and social behaviour. The theory originated in the eighteenth century and can be traced back to political economist and philosopher, Adam Smith. The theory postulates that an individual will perform a cost-benefit analysis to determine whether an option is right for them. It also suggests that an individual's self-driven rational actions will help better the overall economy. Rational choice theory looks at three concepts: rational actors, self interest and the invisible hand.
Behavioral economicsBehavioral economics studies the effects of psychological, cognitive, emotional, cultural and social factors in the decisions of individuals or institutions, and how these decisions deviate from those implied by classical economic theory. Behavioral economics is primarily concerned with the bounds of rationality of economic agents. Behavioral models typically integrate insights from psychology, neuroscience and microeconomic theory. The study of behavioral economics includes how market decisions are made and the mechanisms that drive public opinion.
Loss aversionLoss aversion is a psychological and economic concept which refers to how outcomes are interpreted as gains and losses where losses are subject to more sensitivity in people's responses compared to equivalent gains acquired. Kahneman and Tversky (1992) have suggested that losses can be twice as powerful, psychologically, as gains. When defined in terms of the utility function shape as in the Cumulative Prospect Theory (CPT), losses have a steeper utility than gains, thus being more "painful" than the satisfaction from a comparable gain as shown in Figure 1.
Info-gap decision theoryInfo-gap decision theory seeks to optimize robustness to failure under severe uncertainty, in particular applying sensitivity analysis of the stability radius type to perturbations in the value of a given estimate of the parameter of interest. It has some connections with Wald's maximin model; some authors distinguish them, others consider them instances of the same principle. It has been developed by Yakov Ben-Haim, and has found many applications and described as a theory for decision-making under "severe uncertainty".
Prospect theoryProspect theory is a theory of behavioral economics and behavioral finance that was developed by Daniel Kahneman and Amos Tversky in 1979. The theory was cited in the decision to award Kahneman the 2002 Nobel Memorial Prize in Economics. Based on results from controlled studies, it describes how individuals assess their loss and gain perspectives in an asymmetric manner (see loss aversion). For example, for some individuals, the pain from losing 1,000couldonlybecompensatedbythepleasureofearning2,000. RiskIn simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environment), often focusing on negative, undesirable consequences. Many different definitions have been proposed. The international standard definition of risk for common understanding in different applications is "effect of uncertainty on objectives".
Frontal lobeThe frontal lobe is the largest of the four major lobes of the brain in mammals, and is located at the front of each cerebral hemisphere (in front of the parietal lobe and the temporal lobe). It is parted from the parietal lobe by a groove between tissues called the central sulcus and from the temporal lobe by a deeper groove called the lateral sulcus (Sylvian fissure). The most anterior rounded part of the frontal lobe (though not well-defined) is known as the frontal pole, one of the three poles of the cerebrum.
Group decision-makingGroup decision-making (also known as collaborative decision-making or collective decision-making) is a situation faced when individuals collectively make a choice from the alternatives before them. The decision is then no longer attributable to any single individual who is a member of the group. This is because all the individuals and social group processes such as social influence contribute to the outcome. The decisions made by groups are often different from those made by individuals.
Decision support systemA decision support system (DSS) is an information system that supports business or organizational decision-making activities. DSSs serve the management, operations and planning levels of an organization (usually mid and higher management) and help people make decisions about problems that may be rapidly changing and not easily specified in advance—i.e. unstructured and semi-structured decision problems. Decision support systems can be either fully computerized or human-powered, or a combination of both.
Ambiguity aversionIn decision theory and economics, ambiguity aversion (also known as uncertainty aversion) is a preference for known risks over unknown risks. An ambiguity-averse individual would rather choose an alternative where the probability distribution of the outcomes is known over one where the probabilities are unknown. This behavior was first introduced through the Ellsberg paradox (people prefer to bet on the outcome of an urn with 50 red and 50 black balls rather than to bet on one with 100 total balls but for which the number of black or red balls is unknown).
Regret (decision theory)In decision theory, on making decisions under uncertainty—should information about the best course of action arrive after taking a fixed decision—the human emotional response of regret is often experienced, and can be measured as the value of difference between a made decision and the optimal decision. The theory of regret aversion or anticipated regret proposes that when facing a decision, individuals might anticipate regret and thus incorporate in their choice their desire to eliminate or reduce this possibility.
Brodmann area 45Brodmann area 45 (BA45), is part of the frontal cortex in the human brain. It is situated on the lateral surface, inferior to BA9 and adjacent to BA46. This area in humans occupies the triangular part of inferior frontal gyrus (H) and, surrounding the anterior horizontal limb of the lateral sulcus (H), a portion of the orbital part of the inferior frontal gyrus (H). Bounded caudally by the anterior ascending limb of the lateral sulcus (H), it borders on the insula in the depth of the lateral sulcus.
StriatumThe striatum, or corpus striatum (also called the striate nucleus), is a nucleus (a cluster of neurons) in the subcortical basal ganglia of the forebrain. The striatum is a critical component of the motor and reward systems; receives glutamatergic and dopaminergic inputs from different sources; and serves as the primary input to the rest of the basal ganglia. Functionally, the striatum coordinates multiple aspects of cognition, including both motor and action planning, decision-making, motivation, reinforcement, and reward perception.
Ventral tegmental areaThe ventral tegmental area (VTA) (tegmentum is Latin for covering), also known as the ventral tegmental area of Tsai, or simply ventral tegmentum, is a group of neurons located close to the midline on the floor of the midbrain. The VTA is the origin of the dopaminergic cell bodies of the mesocorticolimbic dopamine system and other dopamine pathways; it is widely implicated in the drug and natural reward circuitry of the brain.
Basal gangliaThe basal ganglia (BG), or basal nuclei, are a group of subcortical nuclei, of varied origin, in the brains of vertebrates. In humans, and some primates, there are some differences, mainly in the division of the globus pallidus into an external and internal region, and in the division of the striatum. The basal ganglia are situated at the base of the forebrain and top of the midbrain. Basal ganglia are strongly interconnected with the cerebral cortex, thalamus, and brainstem, as well as several other brain areas.
Broca's areaBroca's area, or the Broca area (ˈbroʊkə, also UKˈbrɒkə, USˈbroʊkɑː), is a region in the frontal lobe of the dominant hemisphere, usually the left, of the brain with functions linked to speech production. Language processing has been linked to Broca's area since Pierre Paul Broca reported impairments in two patients. They had lost the ability to speak after injury to the posterior inferior frontal gyrus (pars triangularis) (BA45) of the brain.
Lobes of the brainThe lobes of the brain are the major identifiable zones of the cerebral cortex, and they comprise the surface of each hemisphere of the cerebrum. The two hemispheres are roughly symmetrical in structure, and are connected by the corpus callosum. They traditionally have been divided into four lobes, but are today considered as having six lobes each. The lobes are large areas that are anatomically distinguishable, and are also functionally distinct to some degree.
