ABSTRACT
This chapter introduces the subject of decision theory, in both its descriptive and prescriptive aspects. It considers briefly the decision theories that have been suggested to account for observed behaviour patterns. Students of economics are familiar with the traditional concept of ‘utility’ as a fundamental but essentially personal common measure of satisfaction, quite distinct from the variety of goods and services, leisure, extra, that contribute to it. The chapter illustrates the basic techniques of utility function construction, explains the implied theory of decision making, indicates the kinds of insights offered by the theory, and considers the latter’s relevance of an understanding of business decisions. Doubtless the reader will be able to suggest different psychological insights for the construction of different utility function shapes. In doing this it is important to bear in mind that the subject is anticipating the effects of income variations in relation to a particular norm or expected level.
