Decision rule

In decision theory, a decision rule is a function which maps an observation to an appropriate action. Decision rules play an important role in the theory of statistics and economics, and are closely related to the concept of a strategy in game theory.

In order to evaluate the usefulness of a decision rule, it is necessary to have a loss function detailing the outcome of each action under different states.

Formal definition
Given an observable random variable X over the probability space $$ \scriptstyle (\mathcal{X},\Sigma, P_\theta)$$, determined by a parameter θ ∈ Θ, and a set A of possible actions, a (deterministic) decision rule is a function δ : $$\scriptstyle\mathcal{X}$$→ A.

Examples of decision rules

 * An estimator is a decision rule used for estimating a parameter. In this case the set of actions is the parameter space, and a loss function details the cost of the discrepancy between the true value of the parameter and the estimated value. For example, in a linear model with a single scalar parameter $$\theta$$, the domain of $$\theta$$ may extend over $$\mathcal{R}$$ (all real numbers). An associated decision rule for estimating $$\theta$$ from some observed data might be, "choose the value of the $$\theta$$, say $$\hat{\theta}$$, that minimizes the sum of squared error between some observed responses and responses predicted from the corresponding covariates given that you chose $$\hat{\theta}$$." Thus, the cost function is the sum of squared error, and one would aim to minimize this cost. Once the cost function is defined, $$\hat{\theta}$$ could be chosen, for instance, using some optimization algorithm.
 * Out of sample prediction in regression and classification models.