Decision Theory and Operations Research

Abstract

Decision theory, as it has grown up in recent years, is a formalization of the problems involved in making optimal choices. In a certain sense—a very abstract sense, to be sure—it incorporates operations research, theoretical economics, and wide areas of statistics, among others. The formal structure of a decision problem in any area can be put into four parts: (1) the choice of an objective function defining the relative desirability of different outcomes, (2) specification of the policy alternatives which are available to the agent, or decisionmaker, (3) specification of the model, that is, empirical relations that link the objective function, or the variables that enter into it, with the policy alternatives and possibly other variables, and (4) computational methods for choosing among the policy alternatives that one which performs best as measured by the objective function. In the last part, the objective function is maximized subject to the constraints imposed by the model. It is for this reason that decision theory is mathematically, to a great extent, a branch of the theory of constrained maxima.