Normative and Descriptive Theories of Decision Making under Risk: A Short Review
نویسندگان
چکیده
The paper discusses some recent developments in analysis of decision making under risk and uncertainty. First we present the expected utility theory and the basic assumptions of rationality. Second we discuss the critique that has been directed towards the expected utility theory. Next we present the alternative theories: regret theory, prospect theory and theory of stochastic preference. Finally we discuss some practical examples from casinos and gambling markets. It is argued that descriptive theories (e.g. prospect theory) have taken room from normative theories (e.g. expected utility theory). We conclude that we should push forward with empirical testing, both experimental and non-experimental, and develop descriptive theories in the future. However normative and descriptive theories are not mutually exclusive. Both are needed in real life decision making.
منابع مشابه
A peace treaty for the rationality wars? External validity and its relation to normative and descriptive theories of rationality
If we know that certain ways of making decisions are associated with real-life success, is this then how we should decide? In this paper the relationship between normative and descriptive theories of decision-making is examined. First, it is shown that the history of the decision sciences ensures that it is impossible to separate descriptive theories from normative ones. Second, recent psycholo...
متن کاملMany faces of rationality: Implications of the great rationality debate for clinical decision‐making
Given that more than 30% of healthcare costs are wasted on inappropriate care, suboptimal care is increasingly connected to the quality of medical decisions. It has been argued that personal decisions are the leading cause of death, and 80% of healthcare expenditures result from physicians' decisions. Therefore, improving healthcare necessitates improving medical decisions, ie, making decisions...
متن کاملDecision making under risk and uncertainty.
Decision making is studied from a number of different theoretical approaches. Normative theories focus on how to make the best decisions by deriving algebraic representations of preference from idealized behavioral axioms. Descriptive theories adopt this algebraic representation, but incorporate known limitations of human behavior. Computational approaches start from a different set of assumpti...
متن کاملRole Taking Under Financial Risk Decision Making
This paper explores people’s behavior when they are facing financial risks. Through the setting of an economics experiment, people’s willingness to bear financial risks and their tendency to impose risks on others are investigated. The experiment result shows that most people are risk-neutral or risk-averse when making decision under financial environment, and their tendency to impose risks on ...
متن کاملEconomic Rationality under Uncertainty
Though uncertainty pervades all aspects of life and human action, it has a rather short history in economics. Surprisingly, Daniel Bernoulli’s (1738) notion of expected utility, which suggests that (in games of chance) monetary risky ventures ought to be evaluated by the sum of utilities of outcomes weighted by the corresponding probabilities, was not immediately used in economic theory. Indeed...
متن کامل