Theories, Models, and Decision Making
There are many theories, models, and principles in describing the ways that people make decisions. The expected utility theory is based on a normative theory of behavior. It describes how people would behave if they followed certain requirement of rational decision making (Plous, 1993, p. 80). Further studies showed that paradoxes such as framing effects violated the principles of expected utility theory which made researches turn to alternative models of decision making (Plous, 1993, p. 93). Other models are described as descriptive models of decision making which is a model of how people actually make decisions. There are many different reasons why people make the decisions that they do and many different models, theories and principles that explain those reasons. If all the people in the world were perfectly rational decisions makers then evaluating the problems for activity one and choosing the correct alternatives would be calculated and the expected utility maximized (Plous, 1993, p. 95). According to the expected utility theory the correct answer to activity one should have been Alternative A in the first problem and Alternative A in the second problem or Alternative B in the first problem and Alternative B in the second problem. In most cases people chose Alternative A for the first problem and Alternative B for the second problem (Plous, 1993, p. 85). This can be explained by using The Prospect Theory. The Prospect Theory predicts that preferences will depend on how a problem is framed. If the outcome is viewed as gain then decision makers will tend to be risk averse. If the outcome is viewed as loss the decision makers will be risk seeking (Plous, 1993, p. 97). In activity two 80 percent of the students that responded to this study indicated that they would not purchase probabilistic insurance. This finding is predicted by the prospect theory. The prospect theory predicts a certainty effect. The...
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