Research in behavioral economics and behavioral operations offers ample evidence that humans frequently make poor choices in the face of uncertainty. Whereas classic economic theory suggests individuals make decisions under risk by calculating an “expected value” (that is, the average value or “utility” of all the possible outcomes weighted by their probabilities), extensive analysis of actual behavior shows systematic violation of this rule and suggests “the logic of choice does not provide an adequate foundation for a descriptive theory of decision making.” As a result, alternative theories of choice and risk attitudes have been established that attempt to account for the intuitive judgments that individuals make. Although sometimes useful, these intuitive judgments occasionally lead to severe and systematic errors.
Authors: Geri Gibbons, Maria Ibanez, Mark Cotteleer
Source: Deloitte Review
Subject: Decision Making
Click to Add the First »