Lecture 14 Friday , July 24 , 2009

Decision making unfolds as a dynamic and iterative process. In order to choose actions appropriately, a person or animal has to identify the state of its environment based on its sensory inputs and evaluate the desirabilities of the outcomes expected from alternative actions. Economic theories focus on this selection phase of decision making, and seek to understand how various parameters of a given reward, such as its uncertainty and immediacy, affect the preference of a decision maker, which is often referred to as utility. In contrast, psychological theories, especially reinforcement learning theory, aim to understand the process by which the desirabilities or value functions of alternative actions are modified by experience. This learning process is driven by the discrepancy between the expected and actual reward, known as the reward prediction error, but may also rely on other types of error signals.