The And Decision Making : A Critical Literature Review

The decision making process includes cognitive processes that eventually lead to a choice in action while taking into consideration the alternative possibilities (Allen, Dorozenko, & Roberts, 2016). Not all choices have to lead to an action. The values and preferences of the person making the choice also comes into play when making the final decision. Problem-solving to obtain a certain goal or satisfactory by a solution is the main reason people go through the decision making process (Stefaniak, & Tracey, 2014). This process has many factors that end with one final result or solution. The decisions made can be rational or irrational and can be determined by explicit or tacit knowledge (Qingyao, Dongyu, & Weihua, 2016). Since the decision making process can be very difficult at time, psychologists have viewed the process in different perspectives to get a better understanding (Rossi, Picchi, Di Stefano, Marongiu, & Scarsini, 2015). The different perspectives include; psychological, cognitive, and normative or communicative rationality.

Kahneman’s article is an analysis of intuitive thinking and how it guides our decision-making. Although primarily aimed at the field of psychology, it is an interdisciplinary article with applications in economic theorising. Kahneman attempts to differentiate between two systems of thought, one of intuition (system 1) and one of reasoning (system 2), and argues that many judgements and choices are made intuitively, rather than with reason (a slower and more deliberate process). Intuitive decision making, which encompasses heuristics, although generally more efficient and rapid, makes the agent potentially subject to errors due to framing effects or violations of dominance. The analysis of the studies and theoretical situations also provides criticism of the commonly held model of the rational agent within economics. The article also further conceptualises Kahneman’s theory, the Prospect Theory (Kahneman & Tversky, 1979), which has descriptive applications of people’s choice in decision-making situations involving risk and known probability of outcomes. These situations are typically unexplained by the more normative rational agent model.

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In today’s economy, decision-making skills vary for each household; however, the bottom-line goal for every individual is to get the most for their money. In order to do this, there are 4 principles of individual decision-making: facing trade-offs, evaluating what one is giving up to obtain their goal, thinking at the margin, and responding to incentives.

Bounded rationality is defined as a major revision to the theory of rational decision making. It incorporated assumptions that accounted for imperfect information, decisions under uncertainty and perceived probability. It offered two new ways to attack decision problems using science and mathematics.

One makes many decisions on a daily basis. Some are big, but most are tiny. When it comes to decision making, one believes they are in control of most of the decisions they make. However, there are subtle “hidden forces” that influence the decision making process that one is usually not aware of. This type of research is used for marketing to increase profits for businesses. In the book, Predictably Irrational by Dan Ariely, Ariely uses studies and cause and effect to prove that hidden forces unconsciously decrease the amount of control over the decision making process.

If you were given the opportunity to make the decision of receiving $5000 with 100% certainty or the option with a 50% chanced of receiving $7000, what would you do? According to the Prospect Theory, people generally select the option of winning the $5000 where there is absolute certainty of a gain, over the option that is only half as certain. The Prospect Theory was first introduced by psychologists Daniel Kahneman and Amos Tversky in the late 1970’s and was further developed into the early 1990’s after years of research. Essentially, this is an expressive-theoretical model that is to be applied to humans, that describes our behaviors and abilities to make decisions under certain circumstances. And, is comprised of the uncertainty or certainty

Transocean and BP allowed several biases to alter their decision-making skills. There are eight decision-making biases that can take a major toll on decision making. Also, judgmental heuristics are in effect when these biases occur. Judgmental heuristics is a mental shortcut that people use to come to a solution quickly and process information quickly (Moisand, 2000). Of the eight biases that alter decision making, representative heuristic, confirmation bias, and mainly the overconfidence bias. The representative heuristic is an assessment of the probability of an event happening a certain way because it has happened that certain before (Nilsson, Juslin, & Olsson, 2008). If this issue has occurred before, it is likely that these top two employees based their decision to do nothing off of what happened before. Also, the confirmation bias displays itself greatly within this case. The top two employees decided to make their decision before researching what is causing the issue.

In order to demonstrate flaws of the traditional view, Kahneman supports three principles of prospect theory with various examples. First, by pointing out errors in Bernoulli’s model and the indifferent model, Kahneman emphasizes the broad range of the reference point, that it is not only the change of wealth, but also the context and the mindset. Second, Kahneman analyzes loss aversion, one of the dominant mindsets. Third, Kahneman argue that sensitivity has great impact on decision making by providing gambling cases of rare and risky events. With the knowledge of these three principles, Kahneman further implies that people can be trained to against these intuitive system one thinking patterns.

Prospect theory is an important alternative descriptive theory for decision-making under unreliable situation (Kahneman and Tversky 1979), which includes real life selection and psychological analysis between choices that involve risk. Prospect theory, which efforts to explain individual make decisions between risky replacements based on the value of potential gains and losses (Wakker 2010), advanced from expected utility theory, which explains that investors want to maximize expected utility of wealth when unclearly situations (Blavatskyy 2007). According to Kahneman and Tversky (1992), more recent researches perceived nonlinear preferences in choices that do not involve definite events in prospective theory. The concept of framing effect refers description invariances (Kahneman and Tversky 1992). To be specific, individual always makes the same decision in identical choice conditions. Also, decision makers have tendency to

According to the Efficient Market Hypothesis, competition will instantaneously cause the effects of new information to be reflected in actual share prices. This assumption presupposes that the participants in a market act rationally. The concept of the homo economicus has a long-standing history in economics and is a relevant premise of efficient markets. According to the founder of economic thought, Adam Smith, the homo economicus is human who constantly peruses self-interest while always acting rational to reach his subjectively defined ends (Coase, 1994). At times, psychologists joined this discussion and challenged the concept of the economic man. Among the most prominent researchers who question the rationality in human decision making is Daniel Kahneman. Kahneman challenged the rationality in decision making processes and is one of the founders of behavioral economics. Behavioral economists argue that markets are not perfectly efficient because various cognitive biases in humans (HBR, 2015). Among the most prominent cognitive biases that influence stock prices are the Overconfidence Hypothesis and the Disposition Effect.

Published in the July 2016 issue of Cognitive Science, Gonzalez and Mehlhorn’s article, “Framing from Experience: Cognitive Processes and Predictions of Risky Choice,” seeks to advance the work of renowned behavioral economists Tversky and Kahneman. Tversky and Kahneman, a seminal pairing in the fields of economics, cognitive science, and psychology, investigated biases in human decision making that led people to make sub-optimal choices. One of their principle theories, prospect theory, framed decision-making in two graphs. First, they proposed a value graph comparing the subjective and actual values of gains and losses. It took the form of an asymmetrical s-curve, with humans experiencing more displeasure from losses than pleasure from gains and reaping less marginal pleasure from further gains once already at a position of significant gains (Kahneman & Tversky, 1984). Second, they proposed a probability graph which showed that humans tend to overweight low likelihood events and underweight high likelihood events (Kahneman & Tversky, 1984). Taken together, these functions explain some elements of human behavior: people are generally more loss-averse than gain-seeking at a neutral position, they value gains more at a position of loss, and they value gains less at a position of gain.

First, people suffer from inertia, procrastination and “status quo basis” when they are making decisions. Overwhelmed by numerous saving options which require strong mathematic

Prior research has yet to investigate the cognitive process by which attention to opportunity costs influences judgment and decision-making and whether it has a decisional consequence.

Many methods have been developed to simplify the decision making process. In this paper, the rational model of decision making will be discussed first. Then, some of the factors that cause deviation in the rational