The Influence that Uncertain Information on Decision - Dissertation Example

According to Kahnemann and Tversky (1986), reducing probability from certainty to probable benefit leads to a psychological effect of feeling displeasure with the situation. This effect is called as certainty effect. For example, there will be a risk aversion if a group of people is offered a confirmed 30% reward as against 75% chances of 60% reward. In life, a person knows that in the existing situation, he or she can gain a benefit or monetary reward from a service that might be small, but it is confirmed.

On the other hand, there are situations where people can get much bigger rewards, but there is a risk associated with it. For example, some people work in offices, as they know the salaries might be less than operating their own venture, but they have a surety of a certain amount coming to them as their salary. There might be a smaller reward, but there is no uncertainty. There are chances of making big gains in other cases, but the gains are associated with risk. The general trend in human attitude is that people are risk-averse.

They prefer avoiding risks. Considering this situation, they will prefer remaining out of a situation where a big gain is at risk and will prefer to go along with a situation where there is surety. Certainty of monetary benefits has a huge impact on decision making. While taking decisions, people usually try to avoid taking risks, and they prefer going along with a safer bet.The reflection effect can be thoroughly explained as reversing of risk-seeking when gains and losses are involved. The reflection effect can be explained well under prospect theory.

Prospect theory is a descriptive model. This model explains the relationship between alternatives that offer different risk levels. Alternatives with uncertain outcomes have a different impact on decisions. Sometimes people have alternatives to choose from. In some cases, every alternative has a certain risk attached to it. There are probabilities, but the probability percentages are known. Usually, people’s decision making is influenced by the information available in this situation.