Decision-Making in Small Groups - Assignment Example

The paper "Decision-Making in Small Groups" is a perfect example of a business assignment. 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 the 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), the 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.