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Monetizing Your Data by Kathy Williams Chiang, Andrew Roman Wells

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CHAPTER 8Decision Theory: Making It Rational

While Data Science helps you turn information into actionable insights, Decision Theory helps you structure the decision process to guide a person to the correct decision. Decision Theory, along with Behavioral Economics, is focused on understanding the components of the decision process to explain why we make the choices we do. It provides a systematic way to consider tradeoffs among attributes that helps us make better decisions.

According to Martin Peterson, Decision Theory is “more concerned with rational decisions, rather than the right ones…it seems impossible to foresee, even in principle, which act is right until the decision has already been made. It seems much more reasonable to claim that it is always possible to foresee whether a decision is rational.”

As we go through the concepts in this chapter you will see how everyone utilizes some degree of decision theory and behavioral economics in their everyday lives as we make tradeoffs around decisions, most of which have elements of uncertainty.

A real-world example of applying decision theory comes from the security technology world. Often when evaluating security threats, there is a great deal of uncertainty about the type of threat and the right type of countermeasures to deploy. Normally a software engineer codes what they believe to be the best course of action when writing the code. However, this approach is changing. By leveraging decision theory, we can develop probable ...

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