INTRODUCTION

Normative decision theory is the study of guidelines for right action. It involves the formulation and defense of principles of comparative evaluation and choice among competing alternatives, proposed as rules that individuals or societies ought to – or perhaps would want to – follow. It deals also with the implications of these principles both on an abstract level and in reference to particular types of decision situations. The general subject is vast since it covers numerous ethical and normative social theories developed during the past few millennia.

The aim of the present chapter is exceedingly narrow in view of the larger perspective of the subject. It is to discuss a comparatively recent episode in the history of normative decision theory that has been heavily influenced by eighteenth-century Enlightenment thought and the subsequent ascendency of rationalism and scientific method in the analysis of human behavior. The principals in this episode are, with few exceptions, twentieth-century mathematicians, economists, and statisticians. The exceptions include Daniel Bernoulli (1738), who proposed a theory to explain why choices of prudent individuals among risky monetary options often violate the principle of expected profit maximization, and the Rev. Thomas Bayes (1763), who helped to pioneer the notion of probability as a theory of rational degrees of belief.

The theory I wish to describe is most succinctly known as expected utility theory. This is actually a family of related theories that divide into two subfamilies differentiated by the phrases (Luce and Raiffa, 1957) “decision making under risk” and “decision making under uncertainty.”