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The theory can be applied to general settings outside of those identified by costs and benefits. In general, rational decision making entails choosing among all available alternatives the alternative that the individual most prefers. The "alternatives" can be a set of actions ("what to do?") or a set of objects ("what to choose/buy").
The mythological Judgement of Paris required selecting from three incomparable alternatives (the goddesses shown).. Decision theory or the theory of rational choice is a branch of probability, economics, and analytic philosophy that uses the tools of expected utility and probability to model how individuals would behave rationally under uncertainty.
Relevant alternatives theory was primarily developed by Fred Dretske. It states that "knowing a true proposition one believes at a time requires being able to rule out relevant alternatives to that proposition at that time." [1] One way that Dretske attempts to motivate RAT is with examples, such as the following:
Arrow's theorem assumes as background that any non-degenerate social choice rule will satisfy: [15]. Unrestricted domain — the social choice function is a total function over the domain of all possible orderings of outcomes, not just a partial function.
The large subsequent literature has included reformulation to extend, weaken, or replace the conditions and derive implications. In this respect Arrow's framework has been an instrument for generalizing voting theory and critically evaluating and broadening economic policy and social choice theory.
The goal is to make inferences about a criterion that is not directly accessible to the decision maker, based on recognition retrieved from memory. This is possible if recognition of alternatives has relevance to the criterion. For two alternatives, the heuristic is defined as: [1] [2] [3]
Independence of irrelevant alternatives (IIA) is an axiom of decision theory which codifies the intuition that a choice between and should not depend on the quality of a third, unrelated outcome . There are several different variations of this axiom, which are generally equivalent under mild conditions.
In decision theory, the von Neumann–Morgenstern (VNM) utility theorem demonstrates that rational choice under uncertainty involves making decisions that take the form of maximizing the expected value of some cardinal utility function. This function is known as the von Neumann–Morgenstern utility function.