Based on the various papers, what will a good Judgment and Decision Making look like? what theoretical or methodological issues do you see as worthy of further research in this research domain, are their flaws in their findings? and give your intuitive comment regarding the papers?
Humans are not perfect decision makers. Not only are we not perfect, but we depart from perfection or rationality in systematic and predictable ways. The understanding of these systematic and predictable departures is core to the field of judgment and decision making. By understanding these limitations, we can also identify strategies for making better and more effective decisions. The Authors of this articles provide guides on how framing affect our decisions, the different ways we label or code outcomes, introduced a new theory and how they affect our attitude toward risk. Our first article is on Prospect theory which was developed by Kahneman and Tversky (1979). The paper accomplished two things. It collected in one place a series of simple but compelling demonstrations that, in laboratory settings, people systematically but compelling demonstrations that, in laboratory settings, people systematically violate the predictions of expected utility theory, economists’ workhorse model of isolate the predictions of expected utility theory, economists’ workhorse model of decision making under risk. It also presented a new model of risk attitudes called decision making under risk. It also presented a new model of risk attitudes called “prospect theory,” which elegantly captured the experimental evidence on risk taking, including the documented violations of expected utility. In other to make decision which are termed risky, faming becomes a requirement which their next paper expanded on. Rational choice and the framing of decisions: One significant thing about this paper, relies on the fact that it builds on what we know on prospect theory. When making choices between risky options, human decision-makers exhibit a number of framing effects. One of the most prominent framing effects is the tendency for decision makers to evaluate gambles relative to a reference point, and to act risk-seeking when prospects are framed as losses but risk-averse when identical prospects are framed as gains. This tendency for risk-preferences to reverse between loss and gain frames has been termed the reflection effect, and is one of the primary predictions of Prospect Theory.
The psychological principles that govern the perception of decision problems and the evaluation of probabilities and outcomes produce predictable shifts of preference when the same problem is framed in different ways. The effects of frames on preferences are compared to the effects of perspectives on perceptual appearance. The dependence of preferences on the formulation of decision problems is a significant concern for the theory of rational choice. Why? To explain some systematic choices most people, make—choices that contradict the strictly rational model. Kahneman later admitted that their theory’s name was meaningless, but that it was important for getting others to take it seriously, thus giving even more evidence that the framing of an issue matters. How? conducted a series of studies in which subjects answered questions that involved making judgments between two monetary decisions that involved prospective losses and gains(gamble). well, Economists think that prospect theory can overthrow two centuries of neoclassical thought. Others say that it only gives credence to the idea that people repeatedly make daft mistakes. Is there a way of settling the dispute? A more recent work should at least help. Kahneman (1991) described the “Endowment Effect” (Anomalies: The endowment effect, loss aversion, and status quo bias.) It explores the “endowment effect”, one of the chief tenets of prospect theory. Put simply, this means that people place an extra value on things they already own. Think of a favorite sweater, or your house: would you swap either for something of equal market value? Over the past decade, prospect theorists have found support for the endowment effect in scores of experiments. See example *mug and chocolate bars**
How high is your “PAYOFF” that demands your judgement and decisions? In Daniel Kahneman’s book, Thinking Fast and Slow, explains that since all decisions involve uncertainty about the future the human brain automatic judges how to proceed when a potential for loss arises (the system I and system II). Kahneman says organisms that placed more urgency on avoiding threats than they did on maximizing opportunities were more likely to pass on their genes. So, over time, the prospect of losses has become a more powerful motivator on behavior than the promise of gains. Whenever possible, we try to avoid losses of any kind, and when comparing losses to gains we don’t treat them equally. The results of his experiments and the results of many others who’ve replicated and expanded on them have teased out an inborn loss aversion ratio. When offered a chance to accept or reject a gamble, most people refuse to make take a bet unless the possible payoff is around double the potential loss.
Flaws! Considering the assumption of prospect theory, that the reference point, usually the status quo, has a value of zero. This assumption seems reasonable, but it leads to some absurd consequences. Have a good look at the following prospects. What would it be like to own them? A. One chance in a million to win 1million USD, B. 10% chance to win 12USD and 90% chance to win nothing, C. 90% chance to win 1million USD and 10% to win nothing. Winning nothing is a possible outcome in the three gambles and prospect theory assigns the same value to that outcome in the three cases. Winning nothing is the reference point and its value is zero. Do these statements correspond to your experience? Of course not. Winning nothing is a nonevent in the first two cases and assigning it a value of zero makes good sense. In contrast, failing to win in the third scenario is intensely disappointing. Like a salary increase that has been promised informally, the high probability of winning the large sum sets up a tentative new reference point. Relative to your expectations, winning nothing will be experienced as a large loss. Prospect theory cannot cope with this fact, because it does not allow the value of an outcome (in this case, winning nothing) to change when it is highly unlikely, or when the alternatives is very valuable. İn simple word, prospect theory cannot deal with disappointment. Disappointment and the anticipation of disappointment are real and failure to acknowledge them is an obvious flaw. Prospect theory also fail to allow for regret. This emotion of regret and disappointment are real, and decisions makers surely anticipate this emotion when making their choices. İ think prospect theory was accepted by many scholars not because it is “true” but because the concepts that it added to utility theory, notably the reference point and loss aversion, were worth the trouble: they yielded new predictions that out to be true. Well, it’s my own opinion and I don’t expect it to be taken seriously if its wrongly judged.
Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1991). Anomalies: The endowment effect, loss
aversion, and status quo bias. The journal of economic perspectives, 193-206.
Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and
biases. Science, 185(4157), 1124-1131.
Tversky, A., & Kahneman, D. (1986). Rational choice and the framing of decisions. Journal of
Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under
risk. Econometrica: Journal of the Econometric Society, 263-291.