Theories of Decision-Making - Essay Example

Introduction People take decisions every moment of their lives. Every action is taken on the basis of a decision. Yates et al (2003) has defined decision as a “commitment to a course of action” (Newell, Lagnado & Shanks 19). Different studies have revealed that even after knowing the impact of the decisions in life, people do not take right decisions. According to the term used by behavioral economics, people are found to be “predictable irrational” while making decisions (Fan, Ross & Villarreal 138). This is because their decisions are not just based on the ‘facts’ of a particular situation but also on their emotional make up, attitude, cultural background, mood, institution etc (Fan, Ross & Villarreal 138). This makes them subjective rather than objective in their decision making pattern. A study by Shafir and LeBoeuf (2002) has found that an extraordinarily large research data is available which shows that people violate all the rational way of thinking while making decision (Dijksterhuis 90). Rationality To declare that people take ‘irrational’ decisions most of the times, it is important to understand what is meant by ‘rationality’. Evans and Over (1997) has defined rationality as “thinking, speaking, reasoning, making a decision, or acting in a way that is generally reliable and efficient for achieving one’s goals” (Dijksterhuis 90). In this definition of rationality, there is no mention of ‘emotions’, which is one of the most important aspects of human personality. Emotions are the strongest driving force behind people’s behavior and thinking patterns. It has been found that sometimes, people decide on a particular option just because it makes them ‘feel’ good (Mellers 909). For example, a person can decide to watch a certain movie depending on the mood he is in. A person in happy mood might decide to see a comedy and a person in a serious mood might feel like watching a drama. What dominates their decision is not the thought of the ‘benefit’ (rational thought) of watching a movie but how they will ‘feel’ (irrational) after watching a movie. Moreover, it was also found that when people were offered a better option after choosing a particular option, they refused to take that option with the fear of losing the benefits of the previous option chosen. Hence, fear is also one of the factors that dominate the decision making. This shows that there are hundreds of different factors that influence the decision making of a person. Experts from different fields have proposed different theories to explain the psychology behind the decision making of people. Theories of decision making Expected utility theory Daniel Bernoulli (1738) had suggested that “people should make decisions that maximize their expected utility”(Mellers 909). The utility of an outcome is based on the value of the outcome to a decision maker (Newell, Lagnado & Shanks 1104). Utility of a particular outcome is decided on the basis of the emotions attached to the outcome rather than the outcome itself. It means that the material objects involved in the decision making are not as important as the emotions they generate in people. For example, the feeling of ‘satisfaction’ on winning or gaining wealth is more important than the wealth itself (Mellers 909). Later, Savage extended the expected utility theory and called it ‘subjective expected utility’. According to Savage (1971), when people make preferences, they do adhere to most of the principles of the normative thinking, if not all (Shafer 194). He proposed that people reject the axioms only if they are not able to understand it (Ayton). In case they understand the axiom and realize that some of their preferences are going against the axioms, then they realize that they are making an error in decision making and change it (Shafer 196). However, a paper published by Maurice Allais in 1953 proved the people tend to violate the principles of expected utility theory while making decisions (Ayton). Allais’ paradox Paradox is a statement which is self contradictory. However, it has a truth to it. Allais observed that people change their decision making tactics when provided with different choices in such a way, that they seem to be contradicting their own reasons behind the decision making (Ayton). Consider an example of giving two choices to people. A) Certainty of winning $1,000,000 B) 99% chance of winning $5,000,000 It was found that people choose the option A. However, it was found that their pattern of choice change when there is an increase in amount with reduction in the likelihood of winning that amount(Ayton). For example, consider the following options given C) 11% chance of winning $1 million and, D) 10% chance of winning $2 million. If people had followed the same logic as they followed while choosing between the option A and B, then one would expect them to choose option C. On the contrary, it was found that people chose option D (Meller 909), and hence, contradicted their own reasoning. This behavior, where people contradict their own logic in decision making is called as Allais Paradox (Ayton). This shows that people are definitely influenced by something more than a rational thinking while making decisions. However, Savage differed in his opinion and believed that people’s behavior was normatively correct (Ayton). What he meant was that it adhered to the principles of normative thinking. To understand the psychology behind the decision making, psychologists conducted researches and proposed three models of thinking. Models of thinking Normative Model Normative model of decision making suggests the way in which people should make their decision so that it turns out to be a good decision (Newell, Lagnado & Shanks 106). According to normative model, the conclusions or the decisions should be based on statistical rules which make a person to weigh the probability information (Fan, Ross & Villarreal 138). The normative model is based on the theory of probability (Baron 33). Normative theory believes that the rule of probability theory that “all sequences of equally likely events are equally likely to occur” works without fault and hence, according to normative model, this rule should be followed while making decisions (Baron 33). Normative model takes into consideration the goals of a thinker when he is processing a decision in his mind (Baron 33). Normative theory gives importance to the thought of an individual associated with a particular act because it believes that the decision making is not just based on the outcome of an action but also on the psychological and emotional feelings related to that outcome(Baron 33). For example, the probability of a person missing important calls (outcome) as a result of forgetting a cell phone at home (act) is high. This action results in a person getting disappointed (which is a relative emotional consequence of the outcome of an action). This shows that more than an ‘outcome’ of an action, what influences the decision making of a person is the consequences (emotional or psychological desirability) that the outcome brings. Hence, normative model suggests that people should take into consideration the probability of a particular action before making a choice or taking a particular decision. In short, normative model suggests that people should follow the frequency with which a particular outcome has been achieved by doing a particular action (Fan, Ross & Villarreal 138). Looking at the rule of normative model, it can be said that if people follow the rule of normative model, i.e. if they base their decision on probability theory, they will never regret their decisions. However, it is not as easy as it seems because if a normative model is followed every time people make decisions, then people will have to spend a lot of time calculating the probability factors of a particular actions and its outcome (Baron 33). Hence, instead of bringing happiness and satisfaction, which is the expected outcome of any decision, applying normative can lead to frustration and anger for taking such a long time in making decision (Baron 33). If a person is late in taking a decision, then he night lose the opportunity. For example, a person who takes a lot of time in thinking whether to take a particular job or not might lose it to other person who decides to take that job. Hence, time factor is very important in a decision making and this makes the normative model weak. Moreover, when a person makes a decision, he is not just influenced by his rational thinking but lots of other internal and external factors which makes him to be ‘irrational’ in his decision making. Descriptive Model The external factors like culture, family traditions, personal desires, emotions etc. have a lot of influence on how people think. This is the reason why everyone does not take the same decision. People have different tastes, they buy different cars, they like different movies and make different friends. Hence, most of time, people are found to be making ‘irrational’ choices. They are found to be going against the rules of making a right decision. The model that tells us how people actually do make decisions is called as descriptive model (Newell, Lagnado & Shanks 106). It has been found that people do not follow a logic or reasoning while making decisions because they choose to think differently (Baron 32). Also, the theories of logic, arithmetic and probability are invented by people belonging to different culture (Baron 32). Hence, there is an effect of the culture on these theories. In the same way, culture also affects the way people ‘choose’ to think and behave. Hence, their “attitude towards knowledge and decision making” are also different (Baron 32). Prescriptive model Prescriptive models are the models which take into consideration the elements of both, normative and descriptive models, and prescribe how a person should take decisions so as to help him make a right decision(Baron 32). Prescriptive model was developed to help people make decisions using the positive aspects of both, the normative and the descriptive models. Through a technique like decision analysis, prescriptive model shows people how they can take a decision keeping in mind the practical aspects of the decisions and also the values and cultural beliefs of human beings (Ayton ). The technique used in decision analysis to make the decision making easy and effective is called as decision tree (Ayton). In a decision tree, people are asked to divide different aspects of the decision in parts, weight the values and the beliefs associated with those parts and then apply the rules of normative thinking pattern to those parts (Ayton). In this way, people are able to satisfy both, the normative and the descriptive aspects of the decision making. Prescriptive approach helps people to take better decisions. Conclusion It has been found that people tend to follow different thinking patterns in different circumstances while making decision. Human being is not a robot. He is a being who has a heart and a soul. It is not necessary that a choice that seems rationally correct can bring happiness to a person. People tend to choose those things which make them happy and give them pleasure rather than those things which seem to be rationally correct. Hence, saying that human beings are fundamentally irrational in their decision making is wrong. The choices that people make are influenced by their personal desires, goals and feelings. Hence, even if for an outsider a particular decision may seem irrational, for a person who is making a decision, the same decision is perfectly rational. Hence, even though researches have revealed that people make irrational decisions, it is not right to conclude that people are fundamentally irrational. It is just that they have their own personal reasons which other people cannot understand. Works cited Ayton, Peter. “Judgment and Decision-making”. The Encyclopedia of Cognitive Science, Vol. 2.Ed. Nadel, L. London: Macmillan, 2003. Print. Baron, Jonathan. Thinking and deciding. Cambridge: Cambridge UP, 2000. Print. Dijksterhuis. “The Rational Unconscious: Conscious versus unconscious thought in Complex Consumer Choice”. Social Psychology of Consumer Behavior. Ed. Michaela Wanke. New York, NY: Psychology Press,2009. 89-108. Print. Fan, Hung, Conner, Ross, and Villarreal, Luis. AIDS: Science and Society. Sudbury, MA: Jones and Bartlett Publishers, 2010. Print. Mellers, Barbara. “Decision-making”. The Encyclopedia of Cognitive Science, Vol. 2.Ed. Nadel, L. London: Macmillan, 2003. 909-914. Print. Newell, Benjamin,R., Lagnado, David, A. and Shanks, David,R. Straight Choices: The Psychology of Decision Making. New York: Psychology Press, 2007. Print. Shafer, Glenn. “Savage Revisited”. Decision making: descriptive, normative, and prescriptive interactions. Ed. David Bell, Howard Raiffa and Amos Tversky. Cambridge: Cambridge UP, 1988. Print. Read More