Variability, Noise, and Error in Decision Making Under Risk

Graham Loomes

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Decision-Making and Behavioral Economics Economic and Environmental Valuation Experimental Behavioral Economics Studies

Abstract

Most formal theories of decision making under risk assume that each individual has firm and precise preferences, and if they are presented with a particular decision task on several different occasions within a short period of time, they gives the same answer on each occasion. If there are a range of different decisions to be made, almost everyone seems liable to reverse their choice at some point. This chapter outlines a basic broad framework for representing probabilistic patterns of response. It discusses how such patterns might be explained in terms of extraneous noise and error being overlaid upon a deterministic core. Next, the chapter considers models which suppose that variability may be an intrinsic part of how preferences are structured and responses generated. After a discussion on how the two might interact, the chapter considers the challenges such interactions may pose for attempts to compare competing theories of choice.

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References

1979Prospect Theory: An Analysis of Decision under Risk 1988Prospect theory: An analysis of decision under risk 1982Regret Theory: An Alternative Theory of Rational Choice Under Uncertainty 1982Regret in Decision Making under Uncertainty 1993Decision field theory: A dynamic-cognitive approach to decision making in an uncertain environment.2000Developments in Non-Expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk 2005Applied Choice Analysis 1971Reversals of preference between bids and choices in gambling decisions.

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