Utility Theory

Much of this is taken from Luce and Raiffa’s book and G. Owen’s book and this should be thought of as an extract from these references. Decision making is classified into four types based on who makes the decision (i)individual; (ii)group and on under what conditions it is made: (a)certainty;(b)risk; (c)uncertainty; or (d) combination of (b) and (c). Regardless of whether the decision is made by one or many, it comes under individual type decision making if it is based on a single view of the interests involved. So a collection of like minded individual making a decision will for our purposes be a case of individual decision making. If, however, a group with diverse interests is to make a collective decision, it will come under a group decision making. Certainty refers to the fact that each action leads to a single known (to the decision making authority) outcome. Risk refers to each action leading to one of a set of possible outcomes each member of which has known (to the decision making authority) probability of occurrence. Uncertainty refers to the case when any nonempty set of actions has as the consequence a set of specific outcomes but no probabilities are known or it is not even meaningful to associate such probabilities.