Essays on Decision-making In Small Groups: Extending Prospect Theory Assignment

Download full paperFile format: .doc, available for editing

Decision-making in small groups: Extending Prospect theoryINTRODUCTION Decision making situations arrive in people’s lives every day. Prospect Theory is based on the decision making behavior of people. It was developed by Daniel Kahneman and Amos Tversky. This theory was presented as an alternative to expected utility theory. Expected Utility theory is a hypothesis in the field of economics that how the utility of an agent who is facing uncertainty is calculated. It is done by considering utility in all possible states and then constructing a weighted average. These weights are the estimate of the agent regarding the probability of each state.

It is an expectation in terms of probability theory. It was developed by Daniel Bernoulli in 1738. The prospect theory analyzes how people make a decision when they have to choose between two alternatives involving risk. It describes how people judge potential gains and losses. Originally the term ‘prospect’ was used to refer to lottery. According to Tversky and Kahneman (1979), decisions are routinely based on beliefs concerning the likelihood of uncertain events. These could be election outcomes, the guilt or innocence of a defendant, or even the future value of the dollar.

Decision making as a subject has been constantly examined and reviewed. This subject is shared by many disciplines from mathematics to psychology (Kahneman & Tversky, 1984). Some concepts of economics like the disposition effect, risk aversion, risk seeking, are also based on the prospect theory. It is also used in behavioral economics and mental accounting. According to Gilovich and Griffin (2002), judgment under uncertainty is generally based on a limited number of simplifying heuristics rather than extensive algorithmic processing.

This idea has affected theory and research across a range of disciplines beyond psychology and has extended itself to economics, law, medicine, and political science also.   The importance of decision making skills becomes more visible when small groups are called on to make decisions for an organization which could have long term effects. The common belief is that individuals have cognitive biases that distort their perceptions of decision risk, therefore teams should make decisions rather than individuals. Prospect TheoryAccording to the prospect theory, the decision process is divided into two stages.

The first stage is editing and the second is evaluating. Editing consists of the possible outcomes of the decision that are ordered as per some heuristic. People normally find out the basically identical outcomes and set a reference point. The lower outcomes are considered as loss and the higher outcome is considered as gain. Evaluation means computing a value or utility according to the outcomes and also their probabilities and select one alternative that has a higher utility. Basically decision making is analyzed on the grounds of risky and non-risky choices.

This theory was studied by Houghton, Simon, Aquino, & Goldberg (2000). They found that for processing the information, teams often rely on the same heuristics as individuals do. According to Kocher et al, very little is known about the decision making process in small teams although they are very much prevalent in business and also in private lives. They have analyzed the results from a beauty contest game which was done as an experiment. In this experiment, 60% of them preferred to act in a team and teams also recorded more wins than individual.

But the satisfaction level was the same in teams and the individuals although their reasons were different (Kocher, M., Strauss S., Sutter, M., 2006).

Download full paperFile format: .doc, available for editing
Contact Us