Chapter 26

Decision Making

EldarShafirandAmosTversky

26.1 Introduction

Decisions about what to buy, whom to vote for, or where to live shape many
aspects of our lives. The study of decision making is an interdisciplinary enter-
prise involving economics, political science, and psychology, as well as statistics
and philosophy. One can distinguish two approaches to the analysis of decision
making, the normative and the descriptive. The normative approach, which
underlies much of economic analysis, assumes a rational decision maker, who
has well-defined preferences that do not depend on the particular description of
the options or on the specific methods for eliciting preference. This conception,
which has come to be known as the rational theory of choice, is based primarily
on a priori considerations rather than on experimental observation. As a conse-
quence, it has a better claim as a normative account of how decisions ought to
be made than as a descriptive theory of how decisions are actually made.
The descriptive approach to individual decision making is based on empiri-
cal observation and experimental studies of choice behavior. The experimental
evidence indicates that people’s choices are often at odds with the assumptions
of the rational theory, and suggests some empirical generalizations that char-
acterize people’s choices. In this chapter we describe some selected findings
and discuss several psychological principles that underlie the decision-making
process. In the next section we address the psychological evaluation of gains
and losses, and consider people’s attitudes toward risk. Section 26.3 demon-
strates that alternative descriptions of a decision problem can give rise to pre-
dictably different choices. Section 26.4 addresses the asymmetry between the
evaluation of gains and losses, known asloss aversion.Section26.5demon-
strates how alternative methods of eliciting people’s preferences give rise to
inconsistent decisions. In section 26.6 we address the role of conflict and show
how preference among options is altered by the addition of new alternatives.
The tension between descriptive and normative conceptions of decision making
is addressed in the concluding section.

26.2 Risk and Value

Many decisions in the real world (such as investment, gambling, insurance) are
risky in the sense that their outcomes are not known with certainty. To make

From chapter 3 inAn Invitation to Cognitive Science,Vol.3:Thinking, 2d ed., ed. E. E. Smith and D. N.
Osherson (Cambridge, MA: MIT Press, 1995), 77–100. Reprinted with permission.