The paper "Mental Accounting Process, Judgment and Decision-Making" is a good example of a management annotated bibliography. The article discusses the cognitive and psychophysical determinants that are related to risk and riskless choices by considering the relationship between decision and experiences of values. It suggests that the psychophysical of values induce a risk aversion concept into the domain of profits as well as risk-seeking into the domain of losses. Chance psychophysics induces overweighting things that are considered a must as well as those that are improbable in relation to moderate probabilities.
It has described the decision-making process using many frames that result in various preferences that do not match the criteria of making a rational choice. The article explains that mental accounting process of which people organize the transaction outcomes shows some anomalies of the consumer behaviours. For example, the option of acceptability depends on whether a negative impact of the result has been evaluated as a cost or an uncompensated loss. The article suggests that making decisions is similar to prose speaking where people often are engaged in it either knowingly or unknowingly.
It answers the nature of rationality (normative) and the logic of people’ s preferences and beliefs (descriptive) questions (Kahneman and Tversky, 2000). A typical risk decision is the acceptability of a gamble that yields monetary values under certain probabilities. The riskless choice example is the acceptability of goods and services transactions for money or labor. These choices between simple gambles and specified probabilities for monetary outcomes reveal the primary risk and value attitudes. The risky prospects are defined by their consequences and the likelihood of those outcomes. The possible gamble outcome can be framed as a gain or a loss relative to the status quo as well as a wealth incorporating asset position. The article helps follow behavioral economics consequences.
It proposes that people remember the pleasure or pain from any experience; they remember the ‘ peak’ of the experience which was most painful or most pleasurable at the end of the experience than the rest. Example The real example of the above application can be seen when answering the question of why cab drivers are often few on rainy nights. When analyzing the responses, many may argue that during rainy nights, there is a high demand for cabs that results in quick running out of the cabs.
The above is a direct behavioural - economic explanation. However, the choices, values, and frames concept have a different answer. The theory has it that every person has each day’ s outcome into a separate box known as mental accounts. Mental accounts will reveal that the cab drivers work until a certain daily income is reached before going home. The example given by Thaler shows those taxi drivers run night jobs as over time.
However, experienced cabbies do not use mental accounts that much. Similar applies to the choices of deciding whether or not to carry an umbrella. With mental accounts, many people evaluate their choices based on gains and losses in relative rather than absolute terms.
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Janis, I. 1982. Groupthink. Boston: Houghton Mifflin.
Kahneman, D. and Tversky, A. 2000. Choices, values, and frames. New York: Russell sage Foundation.
Linstone, H. 1999. Decision making for technology executives. Boston: Artech House.
Web.stanford.edu, 2015. The Theory of Groupthink Applied to Nanking. [online] Available at: http://web.stanford.edu/~kcook/groupthink.html [Accessed 30 Mar. 2015].
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