Project Decisions, 2nd Edition, 2nd Edition

CHAPTER 4

What Is Rational Choice?

A Brief Introduction to Decision Theory

Different organizations and individuals use different preferences and principles to select policy alternatives. We call those preferences and principles their “decision policies.” An important part of an organization’s decision policy is its attitude toward risk.

In this chapter we look at what it means to make rational decisions. We examine the concept of expected value and the normative expected utility theory, which provides a set of axioms, or rules, for how rational decisions should be made. Finally, we look at prospect theory, which is a descriptive approach to understanding decision-making.

Decision Policy

A decision policy is the set of principles or preferences ...