Virtually all current theories of choice under risk or uncertainty are cognitive and consequentialist. They assume that people assess the desirability and likelihood of possible outcomes of choice alternatives and integrate this information through some type of expectation-based calculus to arrive at decision. The authors propose an alternative theoretical perspective, the risk-as-feelings hypothesis, that highlights the role of affect experienced at the moment of decision making. Drawing on research from clinical, physiological, and other subfield of psychology, they show that emotional reactions to risky situations often drive behavior. The risk-as-feelings hypothesis is shown to explain a wide range of phenomena that have resisted interpretation in cognitive-consequentialist terms.

Risk as Feelings

Most real decisions, unlike those of economics texts, have a status quo alternative—that is, doing nothing or maintaining one's current or previous decision. A series of decision-making experiments shows that individuals disproportionately stick with the status quo. Data on the selections of health plans and retirement programs by faculty members reveal that the status quo bias is substantial in important real decisions. Economics, psychology, and decision theory provide possible explanations for this bias. Applications are discussed ranging from marketing techniques, to industrial organization, to the advance of science.

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Status quo bias in decision making

Virtually all current theories of choice under risk or uncertainty are cognitive and consequentialist. They assume that people assess the desirability and likelihood of possible outcomes of choice alternatives and integrate this information through some type of expectation-based calculus to arrive at a decision. The authors propose an alternative theoretical perspective, the risk-as-feelings hypothesis, that highlights the role of affect experienced at the moment of decision making. Drawing on research from clinical, physiological, and other subfields of psychology, they show that emotional reactions to risky situations often diverge from cognitive assessments of those risks. When such divergence occurs, emotional reactions often drive behavior. The risk-as-feelings hypothesis is shown to explain a wide range of phenomena that have resisted interpretation in cognitive-consequentialist terms.

Risk as feelings.

Alternative descriptions of a decision problem often give rise to different preferences, contrary to the principle of invariance that underlines the rational theory of choice. Violations of this theory are traced to the rules that govern the framing of decision and to the psychological principles of evaluation embodied in prospect theory. Invariance and dominance are obeyed when their application is transparent and often violated in other situations. Because these rules are normatively essential but descriptively invalid, no theory of choice can be both normatively adequate and descriptively accurate.

/pdf/rational-choice-and-the-framing-of-decisions-3g8pr3run9.pdf

Rational choice and the framing of decisions

Food production requires application of fertilizers containing phosphorus, nitrogen and potassium on agricultural fields in order to sustain crop yields. However modern agriculture is dependent on phosphorus derived from phosphate rock, which is a non-renewable resource and current global reserves may be depleted in 50–100 years. While phosphorus demand is projected to increase, the expected global peak in phosphorus production is predicted to occur around 2030. The exact timing of peak phosphorus production might be disputed, however it is widely acknowledged within the fertilizer industry that the quality of remaining phosphate rock is decreasing and production costs are increasing. Yet future access to phosphorus receives little or no international attention. This paper puts forward the case for including long-term phosphorus scarcity on the priority agenda for global food security. Opportunities for recovering phosphorus and reducing demand are also addressed together with institutional challenges.

/pdf/the-story-of-phosphorus-global-food-security-and-food-for-189ky5hvd6.pdf

The story of phosphorus: Global food security and food for thought

Evidence exists that people do not always make decisions involving uncertain monetary rewards as if they were maximizing expected utility of final assets. Explanations for this behavior postulate that the cognitive demands of consistency to such a theory are too great. However, situations exist in which more than mental shortcuts are involved and these anomalies raise questions about expected utility theory as a guide to behavior. This paper explores the possibility that expected utility theory appears to fail because the single outcome descriptor—money—is not sufficient. After making a decision under uncertainty, a person may discover, on learning the relevant outcomes, that another alternative would have been preferable. This knowledge may impart a sense of loss, or regret. The decision maker who is prepared to tradeoff financial return in order to avoid regret will exhibit some of the behavioral paradoxes of decision theory. By explicitly incorporating regret, expected utility theory not only becomes a...

https://www.jstor.org/stable/pdfplus/170353.pdf

Regret in Decision Making under Uncertainty

Decision analysis requires that two equally desirable consequences should have the same utility and vice versa. Most analyses of financial decision making presume that two consequences with the same dollar outcome will be equally preferred However, winning the top prize of $10,000 in a lottery may leave one much happier than receiving $10,000 as the lowest prize in a lottery. This paper explores the implications of disappointment, a psychological reaction caused by comparing the actual outcome of a lottery to one's prior expectations, for decision making under uncertainty. Explicit recognition that decision makers may be paying a premium to avoid potential disappointment provides an interpretation for some known behavioral paradoxes, and suggests that decision makers may be sensitive to the manner in which a lottery is resolved. The concept of disappointment is integrated into utility theory in a prescriptive model.

Disappointment in Decision Making Under Uncertainty

Decision making: Descriptive, normative, and prescriptive interactions.

Some people find decision making under uncertainty difficult because they fear making the “wrong decision,” wrong in the sense that the outcome of their chosen alternative proves to be worse than could have been achieved with another alternative. These people may be willing to pay a premium to avoid consequences that produce this decision regret. This paper continues an earlier investigation into the normative implications of decision regret and looks at situations where the joint probability distribution of consequences between alternatives is not specified at the time of the decision. It includes a discussion of cases where the outcomes produced by alternatives not chosen are never resolved. A consequence of this model of preferences for risky situations is that two components of risk aversion may be identified, decreasing marginal value and regret aversion.

Risk Premiums for Decision Regret

The focus of our attention is the individual decision maker facing a choice involving uncertainty about outcomes. We will consider how people do make decisions, how “rational” people should make decisions, and how we might help less rational people, who nevertheless aspire to rationality, to do better. When we speak of nonrational people, we do not mean those with diminished capacities; we refer instead to normal people who have not given thought to the process of decision making or, even if they have, are unable, cognitively, to implement the desired process. Our decision makers are not economic automatons; they make mistakes, have remorse, suffer anxieties, and cannot make up their minds. We start with a premise, not that people have well thought out preferences, but that they may be viewed as having divided minds with different aspirations, that decision making, even for the individual, is an act of compromise among the different selves. For our purposes we shall augment the usual dichotomy that distinguishes between the normative and descriptive sides (the “ought” and the “is”) of decision making, by adding a third component: the prescriptive side. We do this because much of our concern in this paper addresses the question: “How can real people – as opposed to imaginary, idealized, super-rational people without psyches – make better choices in a way that does not do violence to their deep cognitive concerns?” And we find that much that we have to say on these matters does not fit conveniently into the usual normative or descriptive niches.

David E. Bell

Papers

Regret in Decision Making under Uncertainty

Disappointment in Decision Making Under Uncertainty

Decision making: Descriptive, normative, and prescriptive interactions.

Risk Premiums for Decision Regret

Decision Making: DESCRIPTIVE, NORMATIVE, AND PRESCRIPTIVE INTERACTIONS IN DECISION MAKING