Decision theory deals with methods for determining the optimal course of
action when a number of alternatives are available and their consequences
cannot be forecast with certainty.
It is difficult to imagine a situation which does not involve such decision
problems, but we shall restrict ourselves primarily to problems occurring in
business, with consequences that can be described in dollars of proÞt or
revenue, cost or loss. For these problems, it may be reasonable to consider
as the best alternative that which results in the highest proÞt or revenue,
or lowest cost or loss, on the average, in the long run. This criterion of
optimality is not without shortcomings, but it should serve as a useful guide
to action in repetitive situations where the consequences are not critical.
(Another criterion of optimality, the maximization of expected utility,
provides a more personal and subjective guide to action for a consistent
decision-maker.)