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Decision Analysis (DA) is the discipline comprising the philosophy, theory, methodology, and professional practice necessary to address important decisions in a formal manner. Decision analysis includes many procedures, methods, and tools for identifying, clearly representing, and formally assessing important aspects of a decision, for prescribing a recommended course of action by applying the maximum expected utility action to the managerial decision.
The decision analysis (DA) cycle is the top-level procedure for carrying out a decision analysis. The traditional cycle consists of four phases:
? Basis Development
? Determinisitic Sensitivity Analysis
? Probabilistic Analysis
? Basis Appraisal.
Decision theory in economics, psychology, philosophy, mathematics, and statistics is concerned with identifying the values, uncertainties and other issues relevant in a given decision, its rationality, and the resulting optimal decision. It is very closely related to the field of game theory.
Normative and descriptive decision theory
Most of decision theory is normative or prescriptive, i.e., it is concerned with identifying the best decision to take, assuming an ideal decision maker who is fully informed, able to compute with perfect accuracy, and fully rational.
Statistical decision theory
Several statistical tools and methods are available to organize evidence, evaluate risks, and aid in decision making. The risks of Type I and type II errors can be quantified (estimated probability, cost, expected value, etc.) and rational decision making is improved.
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