![]() In other words, the decision-maker considers some salient value as neutral and compares the outcomes of all alternatives with this reference point. Furthermore, reference points, a form of prior expectations every decision-maker has when confronted with a decision problem, influence the evaluation of outcomes and ultimately choice itself. Both, the way outcomes are described and the way alternatives are presented, can influence a decision-maker into choosing a dominated alternative. We document that framing, i.e., the description and presentation of a decision problem, strongly influences the decision-maker’s choices. In accordance with those common causes, we group the reviewed studies into separate sections. We identify the most common causes for violations of dominance, namely framing, reference points, certainty effects, bounded rationality, emotional responses, the “less-is-more” effect, and the “peak-end” rule. ![]() Our paper reviews recent empirical and experimental literature with respect to violations of dominance in decision theory. Footnote 5 In an iterative process, more comprehensive decision theories such as the rank-dependent expected utility, prospect and cumulative prospect theory were developed to account for successively emerging decision paradoxes. Petersburg paved the way for further amendments by showing that rational choice is not always in line with the premises of expected as well as subjective utility theory. Various decision paradoxes such as of Allais, Ellsberg, and St. ![]() ![]() For instance, they led to the realization that preferences influence decision-making that were subsequently incorporated into early decision theory frameworks. Observed violations of dominance in empirical and experimental research have been key to the evolution of decision theory. Footnote 3 Adding structure to this phenomenon, terms such as risk-aversion were introduced followed by a systematic analysis of stochastic dominance in the modern economics and finance literature. Eventually, scholars acknowledged that simple expected value maximization is not appropriate to capture rational decision-making, for instance as the utility of money is non-linear. According to this view, violations of dominance are random errors that need no further consideration. Footnote 2 In the early days of decision-making theory, scholars assumed that human choice always follows descriptive norms. If God does not exist, there is no difference between the alternatives, but if God exists being Christian is dominant compared to being pagan. In the third century AD, Arnobius the Elder, a scholar from Sicca, argued that Christianity is the dominant alternative in a \(2\times 2\) decision matrix involving religious choice and the existence of God. Violations of the dominance principle are as old as the normative principle itself. While dominance is a generally accepted principle in decision theory, violations thereof have been documented in various disciplines such as management, economics, finance, psychology, or health science. Footnote 1 If a decision set contains a dominant strategy, a rational decision-maker should always select the dominant strategy over its dominated alternative, since violations of this principle result in situations in which the decision-maker is ex ante worse off. The principle of dominance “is perhaps the most obvious principle of rational choice” and serves as the cornerstone of decision theory.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |