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Argument Against EUT

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Recommended: Individual vs group decision-making

Introduction Theory was formulated in 1979 by two Israel psychologists Kahneman and Tversky. The theory was developed in order to create an alternative for the Expected utility theory that was used as the base for decision making under risk for number of years. This was done by identifying the flaws with in the Expected utility theory and addressing those using experimental economics. The theory has two parts editing phase and the evaluation phase. And the striking difference in this theory to EUT would be the value function. This has two arguments addressed in it; they are (i) Reference point and (ii) Magnitude of change. The critique of PT will be done in two phases. Comparing PT to EUT and noting the advantages whiles the 2nd phase by identifying …show more content…

PT - the arguments against EUT When comparing with EUT in this paper author has critique in two stages; One PT says the individuals weigh all the outcomes that arises within prospects, Two the editing phase. These are affected by the expectation of the individual. (Starmer 2000). Certainty effect - When weighting is considered in PT argument goes as people tend to overweigh based on the certainty as oppose to its mentioned in EUT where probability is been used to assess the utility. By using Allais’ paradox (Maurice Allais 1953) authors have identified this. In EUT there substitution axiom has been violated based on PT survey. What it implies in below problem 1 when the wining is significant they tend to go for the option which has a higher probability even though it has a low return. And in problem 2 when the probability is microscopic then they opt in to the option which has a higher gain yet risk is also …show more content…

As well as both the theories as disregard the process of group decision making. The process of an individual decision making appose to a group is very different. There are many factors in effect e: g size, group composite and the overall personality. (Chernyshenko et al 2003). Another characteristic that these two show case is the linearity of the theories. One of the noticeable flaws in PT is that this theory has not considered the sunk cost involve. (Garland and new port 1991. Heath 1995, Carmichaek 2003, Highhouse and yuce 1996. Parayre 1995 schaubroeck and Davis 1994). The sunk cost is very much valuable in the decision making process even though the historical practice is to ignore it. Example for this can say a college student in his 3rd year would consider dropping out and exploring other possibilities in a theoretical world he should not consider the tuition fee he paid for the past 3 years, but in reality the student will consider the cost that if he continues to stay on oppose to the cost that he will render if he takes the 2nd option. And he will also consider the value after completing the 4 years oppose to value he will get at the moment in the labor

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