What are the processes involved with how we make decisions about what car to buy, what college to attend, or even what type of bread to get at the grocery store?
Classical decision theory
Early models are based on the idea of the rational actor, or economic man. They rely on three assumptions:
Subjective expected utility theory
Similar to the Economic Man theory in that it assumes people are making reasonably informed, rational decisions.
We make decisions that are an attempt to maximize pleasure (positive utility) and minimize pain (negative utility).
We still make rational calculations of options, but do it based on our subjective judgement of the utility (+ or -) of our various options, and our subjective estimate of the probability that that utility will be realized with a particular option.
Satisficing
Simon (1957) claimed that people are reasonably, but not totally rational, i.e. they are rational within limits. He called this bounded rationality.
The basic idea is that, rather than considering all possible options, we search until we find something that satisfies our minimum criteria.
Elimination by aspects
What happens when we feel like we have too many options to consider?
Tversky hypothesized that we pick some aspect of the decision and eliminate all the options that don’t meet our minimum criterion for that aspect. Then we pick another, etc.
Heuristics and biases
All of the previous models of decision making assume that people are, for the most part, rational decision makers.
Are they?
There seem to be various biases that influence our judgements:
Representativeness: We estimate the probability of some event based on two things — how representative we think the event is of the population as a whole, and how much it captures the important features of the process that generates it.
Gambler’s fallacy: "Well, I lost this time, which means I ought to win next time."
Availability: We judge something as being more probably based on how much more easily we can remember examples of the event.