Modern Decisions

Reading 2.2, Kahneman, D. and Tvesky, A. (1984), ‘Choices, values, and frames’, American Psychologist, 39(4)

Abstract:    It is normal human tendency to make decisions. Most of the decisions are made depending upon the outcome and gains that can be achieved. The author here in the above context classifies decision making into two types that is normative and descriptive decision making. Normative decision making is concerned in factors involving rational and logical thinking whereas descriptive decision making deals with people’s beliefs or what they expect (want). Whether to take decision or not depends upon the risky and riskless choices. Risky projects depend upon uncertain events having different weights of probability that leads to monetary outcomes. Riskless decision on contrary has some monetary outcomes for sure. It is proved by Daniel Bernoulli in one of his writings that people go for riskless projects rather than risky projects even though the monetary outcomes of risky decision if successful is more profitable.  On the contrary, the decision may change if the same risky project instead of defining it in gains is expressed in terms of loss. These factors that made decision maker to change decision are called as cognitive and psychophysical factors. Over weighing a certain task(pseudo –certainty) or decisions taken under influence of higher authority are psychophysical factors.

                   Modern decisions deal with qualitative principles and mental accounting including psychophysical factors. But in some cases decisions have to be made depending upon rational thinking. The way to approach rational thinking is to look at total assets rather than looking at losses and gains. Dominance and invariance are tools used for rational decision making. Invariance is affected by formulation and framing effect making the decision maker from risk seeking to risk aversion and vice versa.

The writer here extends his approach while making choices between multi-attribute options associated with trade/transaction through mental accounting. The acceptance of option depends if the value of disadvantages are far less as compared to advantages.      

Work Experience:   While working as an intern in “ZYCUS ELECTRICAL” there was a plant failure due to improper working of relay switch. The general manager of company contacted the engineers and asked for solution since it had happened previous week and the production line stopped for 6 hours. The engineers came with two choices one with replacing the relay switch (which would cost more) and other by repairing it. Since the budget was tight manager decided to repair the switch instead of replacing them. Following the managers order the maintenance team started the work of repair, but after certain time the team notified the manager that this might happen again and it would incur more loss and decrease our production to high extent. Thus hearing this manager reverted his risky decision to risk aversion decision in order to prevent further more failures.