Rational Choice and the Framing of Decisions

  • Amos Tversky
  • Daniel Kahneman
Part of the NATO ASI Series book series (volume 56)

Abstract

Alternative descriptions of a decision problem often give rise to different preferences, contrary to the principle of invariance that underlines the rational theory of choice. Violations of this theory are traced to the rules that govern the framing of decision and to the psychological principles of evaluation embodied in prospect theory. Invariance and dominance are obeyed when their application is transparent and often violated in other situations. Because these rules are normatively essential but descriptively invalid, no theory of choice can be both normatively adequate and descriptively accurate.

Keywords

Income Defend Editing Stake Concession 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Akerlof, G. A., and Yellen, J. 1985. Can small deviations from rationality make significant differences to economic equilibria? American Economic Review 75: 708–20.Google Scholar
  2. Allais, M. 1953. Le compartement de l’homme rationnel devant le risque: Critique des postulates et axiomes de l’Ecole Americaine. Econometrica 21: 503–46.CrossRefGoogle Scholar
  3. Allais, M. 1979. The foundations of a positive theory of choice involving risk and a criticism of the postulates and axioms of the American School. In M. Allais and O. Hagen (eds.), Expected Utility Hypotheses and the Allais Paradox. Dordrecht: Reidel.Google Scholar
  4. Arrow, K. J. 1982. Risk perception in psychology and economics. Economic Inquiry 20: 1–9.CrossRefGoogle Scholar
  5. Bazerman, M. H. 1983 Negotiator judgment. American Behavioral Scientist 27: 211–28.CrossRefGoogle Scholar
  6. Bell, D. E. 1982. Regret in decision making under uncertainty. Operations Research 30: 961–81.CrossRefGoogle Scholar
  7. Bishop, R. C., and Heberlein, T. A. 1979. Measuring values of extra-market goods: Are indirect measures biased? American Journal of Agricultural Economics 61: 926–30.CrossRefGoogle Scholar
  8. Chew, S. H. 1983. A generalization of the quasilinear mean with applications to the measurement of income inequality and decision theory resolving the Allais paradox. Econometrica 51: 1065–92.CrossRefGoogle Scholar
  9. Chew, S. H., and MacCrimmon, K. 1979. Alpha utility theory, lottery composition, and the Allais paradox. Working Paper no. 686. Vancouver: University of British Columbia.Google Scholar
  10. Clark, H. H., and Clark. E. V. 1977. Psychology and Language. New York: Harcourt Brace Jovanovich.Google Scholar
  11. Einhorn, H, J. and Hogarth, R. M. 1978. Confidence in judgment: Persistence of the illusion of validity. Psychological Review 85: 395–416.CrossRefGoogle Scholar
  12. Ellsberg, D. 1961. Risk ambiguity, and the Savage Axioms. Quarterly Journal of Economics 75: 643–69.CrossRefGoogle Scholar
  13. Eraker, S. E., and Sox, H. C. 1981. Assessment of patients’ preferences for therapeutic outcomes. Medical Decision Making 1: 29–39.CrossRefGoogle Scholar
  14. Fischhoff, B. 1983. Predicting frames. Journal of Experimental Psychology: Learning Memory and Cognition 9: 103–16.CrossRefGoogle Scholar
  15. Fishburn, P. C. 1982. Nontransitive measurable utility. Journal of Mathematical Psychology 26: 31–67.CrossRefGoogle Scholar
  16. Fishburn, P. C. 1983. Transitive measurable utility. Journal of Economic Theory 31: 293–317.CrossRefGoogle Scholar
  17. Fishburn, P. C. 1984. SSB utility theory and decision making under uncertainty. Mathematical Social Sciences 8: 253–85.CrossRefGoogle Scholar
  18. Fishburn, P. C. 1985. Uncertainty aversion and separated effects in decision making under uncertainty. Working paper. Murray Hill, N.J.: AT & T Bell Labs.Google Scholar
  19. Fishburn, P. C., and Kochenberger, G. A. 1979. Two-piece von Neumann-Morgenstern utility functions. Decision Sciences 10: 503–18.CrossRefGoogle Scholar
  20. Grether, D. M. 1980. Bayes rule as a descriptive model: The representativeness heuristic.Quarterly Journal of Economics 95: 537–57.Google Scholar
  21. Grether, D. M., and Plott, C. R. 1979. Economic theory of choice and the preference reversal phenomenon. American Economic Review 69: 623–38.Google Scholar
  22. Hagen, O. 1979. Towards a positive theory of preferences under risk. In M. Allais and O. Hagen (eds.), Expected Utility Hypotheses and the Allais Paradox. Dordrecht: Reidel.Google Scholar
  23. Haltiwanger, J., and Waldman, M. 1985. Rational expectations and the limits of rationality: An analysis of heterogeneity. American Economic Review 75: 326–40.Google Scholar
  24. Hammond, P. 1985. Consequential behavior in decision trees and expected utility. Institute for Mathematical Studies in Social Sciences Working Paper no. 112. Stanford, California: Stanford University.Google Scholar
  25. Hansson, B. 1975. The appropriateness of expected utility model. Erkenntnis 9:175–93.Google Scholar
  26. Hausch, D. B.; Ziemba, W. T.; and Rubenstein, M. E. 1981. Efficiency of the market for racetrack betting. Management Science 27:1435–52.Google Scholar
  27. Hershey, J. C., and Schoemaker, P. J. H. 1980. Risk taking and problem context in the domain of losses: An expected utility analysis. Journal of Risk and Insurance 47: 111–32.CrossRefGoogle Scholar
  28. Kahneman, D.; Knetsch, J.L.; and Thaler, R. H. 1986. Fairness and the assumptions of economics. Journal of Business 59(4).Google Scholar
  29. Kahneman, D.; Knetsch, J. L.; and Thaler, R. In press. Perceptions of fairness: Entitlements in the market. American Economic Review Google Scholar
  30. Kahneman, D., and Tversky, A. 1979. Prospect theory: An analysis of decision under risk. Econometrica 47: 263–91.CrossRefGoogle Scholar
  31. Kahneman, D., and Tversky, A. 1982. The psychology of preferences. Scientific American 246: 160–73.CrossRefGoogle Scholar
  32. Kahneman, D., and Tversky, A. 1984. Choices, values, and frames. American Psychologist 39: 341–50.CrossRefGoogle Scholar
  33. Karmarkar, U.S. 1978. Subjectively weighted utility: A descriptive extension of the expected utility model. Organizational Behavior and Human Performance 21: 61–72.CrossRefGoogle Scholar
  34. Knetsch, J. L., and Sinden, J. A. 1984. Willingness to pay and compensation demanded: Experimental evidence of an unexpected disparity in measures of value. Quarterly Journal of Economics 99: 507–21.CrossRefGoogle Scholar
  35. Knez, P.; Smith, V. L.; and Williams, A. W. 1985. Individual rationality, market rationality and value estimation. American Economic Review: Papers and Proceedings 75: 397–402.Google Scholar
  36. Loomes, G., and Sugden, R. 1982. Regret theory: An alternative theory of rational choice under uncertainty. Economic Journal 92: 805–24.CrossRefGoogle Scholar
  37. Luce, R. D., and Krantz, D. H. 1971. Conditional expected utility. Econometrica 39: 253–71.CrossRefGoogle Scholar
  38. Luce, R. D., and Narens, L. 1985. Classification of concatenation measurement structures according to scale type. Journal of Mathematical Psychology 29: 1–72.CrossRefGoogle Scholar
  39. Machina, M. J. 1982 “Expected utility” analysis without the independence axiom. Econometrica 50:277–323.Google Scholar
  40. McNeil, B. J.; Pauker, S. G.; Sox, H. C. Jr.; and Tversky, A. 1982. On the elicitation of preferences for alternative therapies. New England Journal of Medicine 3 06: 1259–62.CrossRefGoogle Scholar
  41. March, J. G. 1978. Bounded rationality, ambiguity, and the engineering of choice. Bell Journal of Economics 9: 587–608.CrossRefGoogle Scholar
  42. Markowitz, H. 1952. The utility of wealth. Journal of Political Economy 60: 151–58.CrossRefGoogle Scholar
  43. Nelson, R. R., and Winter, S. G. 1982. An evolutionary Theory of Economic Change. Cambridge, Mass.: Harvard University Press.Google Scholar
  44. Payne, J. W.; Laughhunn, D. J.? and Crum, R. 1980. Translation of gambles and aspiration level effects in risky choice behavior. Management Science 26:1039–60.Google Scholar
  45. Quiggin, J. 1982. A theory of anticipated utility. Journal of Economic Behavior and Organization 3: 323–43.CrossRefGoogle Scholar
  46. Raiffa, H. 1968. Decision Analysis: Introductory Lectures on Choices under Uncertainty Reading, Mass: Addison-Wesley.Google Scholar
  47. Russell, T. and Thaler, R. 1985. The relevance of quasirationality in competitive markets. American Economic Review 75: 1071–82.Google Scholar
  48. Savage, L. J. 1954. The Foundations of Statistics. New York: Wiley.Google Scholar
  49. Schelling, T. C. 1981. Economic reasoning and the ethics of policy. Public Interest 63: 37–61.Google Scholar
  50. Schmiedler, D. 1984. Subjective probability and expected utility without additivity. Preprint Series no. 84. Minneapolis: University of Minnesota, Institute for Mathematics and Its Applications.Google Scholar
  51. Schumpeter, J. A. 1954. History of Economic Analysis. New York: Oxford University Press.Google Scholar
  52. Segal, U. 1984. Nonlinear decision weights with the independence axiom. Working Paper in Economics no. 353. Los Angeles: University of California, Los Angeles.Google Scholar
  53. Simon, H. A. 1955. A behavioral model of rational choice. Quarterly Journal of Economics 69: 99–118.CrossRefGoogle Scholar
  54. Simon, H. A. 1978. Rationality as process and as product of thought. American Economic Review: Papers and Proceedings 68: 1–16.Google Scholar
  55. Slovic, P.; Fischhoff, B.; and Lichenstein, S. 1982. Response mode, framing, and information processing effects in risk assessment. In R. M. Hogarth (ed.), New Directions for Methodology of Social and Behavioral Science: Question Framing and Response Consistency.San Francisco: Jossey-Bass.Google Scholar
  56. Slovic, P., and Lichtenstein, S. 1983. Preference reversals: A broader perspective. American Economic Review 73: 596–605.Google Scholar
  57. Slovic, P., and Tversky, A. 1974. Who accepts Savage’s axiom? Behavioral Science 19: 368–73.CrossRefGoogle Scholar
  58. Smith, V. L. 1985. Experimental Economics: Reply. American Economic Review 75: 265–72.Google Scholar
  59. Stigler, G. J., and Kindahl, J. K. 1970. The Behavior of Industrial Prices. New York: National Bureau of Economic Research.Google Scholar
  60. Thaler, R. H. 1980. Towards a positive theory of consumer choice. Journal of Economic Behavior and Organization 1: 39–60.CrossRefGoogle Scholar
  61. Tversky, A. 1969. Intransitivity of preferences. Psychological Review 76: 105–10.CrossRefGoogle Scholar
  62. Tversky, A. 1977. On the elicitation of preferences: Descriptive and prescriptive considerations. In D. E. Bell, R. L. Keeney, and H. Raiffa (eds.), Conflicting Objectives in Decisions. New York: Wiley.Google Scholar
  63. Tversky, A., and Kahneman, D. 1981. The framing of decisions and the psychology of choice. Science 211: 453–58.CrossRefGoogle Scholar
  64. Tversky, A., and Kahneman, D. 1983. Extensional versus intuitive reasoning: The conjunction fallacy in probability judgment. Psychological Review 90: 293–315.CrossRefGoogle Scholar
  65. von Neumann, J., and Morgenstern, O. 1944. Theory of Games and Economic Behavior. Princeton, N.J.: Princeton University Press.Google Scholar
  66. Weber, R. J. 1982. The Allais paradox, Dutch auctions, and alpha-utility theory. Working paper. Evanston, Ill.: Northwestern University.Google Scholar
  67. Yaari, M. E. 1984. Risk aversion without decreasing marginal utility. Report Series in Theoretical Economics. London London School of Economics.Google Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 1989

Authors and Affiliations

  • Amos Tversky
    • 1
  • Daniel Kahneman
    • 2
  1. 1.Department of PsychologyStanford UniversityStanfordUSA
  2. 2.Department of PsychologyUniversity of CaliforniaBerkeleyUSA

Personalised recommendations