4.1 An Overview of the Decision-making Theory

Making decisions is an inevitable procedure in our daily life, to buy or not to buy in the crazy Chinese shopping day Double 11, to order which dishes in the restaurant, to dress which clothes, and so on so forth. Many contributions have been made to research on decision making.

David E. Bell, Howard Raiffa, Amos Tversky (1988) collected a series of papers related to decision-making under uncertainty in the volume Decision Making Descriptive, Normative, and Prescriptive Interactions. Three analyze approaches of decision-making are discussed, normative approach, descriptive approach, and prescriptive approach, respectively. The descriptive principle is related to the decisions people made and how people decide. Normative principle is about the logically consistent procedures and how people should make. The third group prescriptive principle focuses on how to help people to make good decisions and how to train people to make better decisions. 

4.1.1 The Impact of the Framing of Alternatives from Sense and Reference Perspective

Descriptive and Normative principles are concerned with rational choices. While some scholars, such as Amos Tversky and Daniel Kahneman insist that people are tend to make irrational decisions because of the bounded rationality of human beings.

Amos Tversky and Daniel Kahneman (1981) proved that the preference between options would reverse with the changes of frame, which reveals the imperfection of human perception and decision. Amos Tversky and Daniel Kahneman illustrated the effect of framing by problems 1 and 2.

Problem 1: Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is excepted to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimate of the consequences of the programs are follows:

If Program A is adopted, 200 people will be saved. [ 72 percent]

If Program B is adopted, there is 1/3 probability that 600 people will be saved, and 2/3 probability that no people will be saved. [28 percent]

Which of the two programs would you favor？

There are altogether 152 students from the Stanford University and the University of British Columbia made their decision for this problem. The majority choice is risk averse: the prospect of certainly saving 200 lives is more attractive than a risky prospect of equal expected value, that is, a one-in-three chance of saving 600 lives.

A second group of respondents was given the cover story of problem 1 with a different formulation of the alternative programs, as follow:

Problem 2:

If Program C is adopted 400 people will die. [22 percent]

If Program D is adopted there is 1/3 probability that nobody will die and, and 2/3 probability that 600 will die. [78 percent]

Which of the two programs would you favor？

The majority choice in Problem 2 is risk taking: the certain death of 400 people is less acceptable than the two-in-three chance that 600 people die.

The essence of the options in the above two problems is the same, and what is different is the framing of the options. However, the preference is reversed. Amos Tversky and Daniel Kahneman got the result that the preferences in problems 1 and 2 illustrate a common pattern: choices involving gains are often risk averse and choices involving losses are often risk taking.

We can also analyze alternative frames for a decision problem by the Sense and Reference Theory. As the alternative frames are different expression modes for a shared decision problem, the different expression modes (the different frames) are the signs attached corresponding sense, and their reference is the same solution options. In problem 1 and 2, A and C are signs shared same reference, and B and D are signs shared their reference. Sense of A and sense of B are concerned with gains, while sense of C and D are concerned with losses. When people are going to choose signs of a definite reference, their decisions will be affected by the judgment of the signs. The judgment of the sign, involving gains (positive value) or losses (negative value), is the individuals’ ideas towards the sense.

4.1.2 The Impact of Intuition and Accessibility

Intuition is distinguished from reasoning.  

4.1.3 The Impact of Gains and Losses

4.1.4 The Impact of Representativeness

In the paper Judgment under Uncertainty: Heuristics and Biases, Amos Tversky and Daniel Kahneman discovered that repersentativeness will lead to biases in decision making. When the -makers judge the probability of an option, they typically rely on the representativeness heuristic. decision It was illustrated by the following example:

An individual has been described by a former neighbor as follows: “Steve is very shy and withdrawn, invariably helpful, but with little interest in people, or in the world of reality. A meek and tidy soul, he has a need for order and structure, and passion for derail.” 

People are asked to assess the probability that Steve is engaged in a particular occupation from a list of possibilities (for example, farmer, salesman, airline pilot, librarian, or physician)? In the representativeness heuristic, the probability that Steve is a librarian, for example, is assessed by the degree to which he is representative, or similar to, the stereotype of a librarian.

This approach to judge the probability is definite false. One of the factors that should affect the judgment of probability is prior probability of the outcomes. 

In the case of Steve, the prior probability like the fact that there are many more farmers than librarians in the population should be taken into consideration rather than the similarity or the representativeness. 

Because of the representativeness, the decision-makers are tend to be insensitive to the prior probability and the size of sample.

The insensitivity to the sample size was illustrated by the following question:

A certain town is served by two hospitals. In the larger hospital, about 45 babies are born each day, and in the smaller hospital about 15 babies are born each day. As you know, about 50 percent of all babies are boys. However, the exact percentage varies from day to day. Sometimes it may be higher than 50 percent, sometimes lower.

For a period of one year, each hospital recorded the days on which more than 60 percent of the babies born were boys. Which hospital do you think recorded more such days?

The larger hospital. (21)

The smaller hospital. (21)

About the same. ( that is, within 50 percent of each other) (53)

The values in parentheses are the number of undergraduate students who chose each answer.

Most of students chose “about the same”, while as we know, the larger the sample size is, the less possibility there is to stray from 50 percent. The rational choice should be “the smaller hospital”.

Now, we can get a conclusion that when facing alternatives, people are expected to choose the best option, or the most rational one. The decision-makers will consider the gains and losses, the contingencies, the prospects, risks, the decision weight. However, the decision-making process will be affected by many factors, such as the framing of the alternatives, intuition, accessibility norms, habits and personal characteristics of the decision-maker.