How Do People Make Judgments and Decisions

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How do people make judgements and decisions?

Decision and judgment-making are normal human activities and people make a high number of these every day, so you could assume that psychologists have been studying this area for many years but it wasn’t until the 1950’s that psychologists began their exploration into this subject. Behaviourism set the belief that psychology should be scientific and objective and should observe similar criteria to the natural sciences. The mathematicians and economists were more interested in how decisions should be made and how do we recognise good judgement and decisions.

Psychologists today think very differently to economists when it comes to behavioural research exploring decision making. As Lopes 1994(cited in Naish 2005) put it ‘Economics considers itself a normative science, the very term an oxymoron of ought and is’ The questions raised here is how do human beings actually form firm opinions and act on them and how judgments are reached from these opinions and does the evidence from what we ought to do regarding decisions and judgments represent what we actually do. I will argue that although theorists have come a long way, the evidence still doesn’t explain how we actually make judgements and decisions instead just highlights the discrepancies of the normative theory.

There are two main types of theories of decision making; descriptive and normative theories. The descriptive theory concentrates on how people actually make decisions and the latter defines how they should make decisions. The majority of research into decision-making is based on choices that have some kind of uncertainty to them. In other words; we take gambles. A descriptive model was proposed by Kahneman and Tversky (1979) known as the ‘prospect theory’. When making choices, we go through two phases; the editing and the second phase. In the former, problem solving begins and any issues that are irrelevant or unimportant can be disregarded, choices are then calculated as either a ‘gain’ or a ‘loss’. The second phase consists of assessing these gains and losses and a judgment being made of the possible outcomes. These decisions come from a neutral reference point. Here, risks are valued and decisions made on whether to take a risk from the information given. What has been found is that losses are more significant than gains of equivalent value. Economist Paul Samuelson (cited in Naish 2005) demonstrated how this can affect how someone takes a gamble. He asked a fellow economist if he would accept a bet in which Samuelson flipped a coin and the colleague had a chance of winning $200; if he lost, he would have to pay Samuelson $100. The colleague turned him down; however, he was prepared to play if the coin was flipped 100 times.

This theory is inconsistent with what normative theorists believe. The SEU or Subjective expected utility developed by Savage 1954 (cited in Naish 2005), has been applied to gambles and rationally a decision-maker wouldn’t accept one and not the other, therefore breaching some of the principles outlined in the model. In order to take comply with SEU then certain principles need to be acknowledged. These are Comparability, transitivity, dominance, independence and invariance. If this is so then we can take that either there’s something wrong with the choice that was made, that there’s something amiss with the normative theory or a combination of the two. Either way, we still seem to get on with our lives ok.

So what can we do to make better choices? One approach that aims to help people make better decisions is decision analysis. This is a prescriptive approach based on SEU which looks at the options at hand splitting them into more manageable chunks so that ideals and attitudes can be assessed and integrated into the normative principles stated above. To help represent the decision, one framework developed is that of a decision tree (von Winterfeldt and Edwards, 1986, cited in Naish,...
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