Decision Theory and Decision Analysis

In the 20th century, John Von Neumann and Oskar Morgenstern reintroduced, formalized, and extended the work of Daniel Bernoulli, founding what is now referred to as decision theory (von Neumann and Morgenstern, 1944).

Decision theory is an extension of probability theory, adding adds axioms and theorems to probability theory that enable mathematicians to represent decision alternatives, costs, and benefits. Leonard J. Savage (1954) further developed decision theory into its modern form.

The field of decision analysis emerged in the 1960s, as engineers and economists applied decision theory to the modeling of actual decision problems (Raiffa, 1968). Decision analysis is sometimes referred to as the art of decision theory, because creativity is required to translate a complex real-world situation into a mathematical model (Henrion et al., 1991). Decision analysis is a large field. Many individuals working in both the government and the private sector specialize in decision analysis. We list a sample of textbooks, journals, and professional societies under "Additional Resources'' at the end of this chapter.

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