Behavioral Decision Theory: Psychological and Mathematical Descriptions of Human Choice Behavior

Description

This book is the second edition of Behavioral Decision Theory, published in 2014. The main approach and structure of this book have been retained in the new edition. However, this second edition provides a fresh overview of the idea of behavioral decision theory and related research findings such as theoretical and empirical discoveries of preference formation, time discounting, social interaction, and social decision making. The book covers a wide range from classical to relatively recent major studies concerning behavioral decision theory, which, in brief, is a general term for descriptive theories to explain the psychological knowledge related to people’s decision-making behavior. It is called a theory but is actually a combination of various psychological theories, for which no axiomatic systems―such as those associated with the utility theory widely used in economics―have been established. The utility theory is often limited to qualitative knowledge; however, as the studies of Nobel laureates H. A. Simon, D. Kahneman, and R. Thaler have suggested, the psychological methodology and knowledge of behavioral decision theory have been applied widely in such fields as economics, business administration, and engineering and are expected to become even more useful in the future. Research into people’s decision making represents an important part in those fields, various aspects of which overlap with the scope of behavioral decision theory. This theory is closely related to behavioral economics and behavioral finance, which have come into greater use in recent years. This book will appeal especially to graduate students, advanced undergraduate students, and researchers who are interested in decision-making phenomena. Editorial Reviews From the Back Cover This book is the second edition of Behavioral Decision Theory, published in 2014. The main approach and structure of this book have been retained in the new edition. However, this second edition provides a fresh overview of the idea of behavioral decision theory and related research findings such as theoretical and empirical discoveries of preference formation, time discounting, social interaction, and social decision making. The book covers a wide range from classical to relatively recent major studies concerning behavioral decision theory, which, in brief, is a general term for descriptive theories to explain the psychological knowledge related to people’s decision-making behavior. It is called a theory but is actually a combination of various psychological theories, for which no axiomatic systems―such as those associated with the utility theory widely used in economics―have been established. The utility theory is often limited to qualitative knowledge; however, as the studies of Nobel laureates H. A. Simon, D. Kahneman, and R. Thaler have suggested, the psychological methodology and knowledge of behavioral decision theory have been applied widely in such fields as economics, business administration, and engineering and are expected to become even more useful in the future. Research into people’s decision making represents an important part in those fields, various aspects of which overlap with the scope of behavioral decision theory. This theory is closely related to behavioral economics and behavioral finance, which have come into greater use in recent years. This book will appeal especially to graduate students, advanced undergraduate students, and researchers who are interested in decision-making phenomena. About the Author Kazuhisa Takemura is a Japanese psychologist and educator. Besides serving as a professor at the Department of Psychology, Waseda University, he is also the director of the University’s Center for Decision Research, a professor at the Waseda MBA School, and a research fellow at the Waseda Research Institute for Science and Engineering. He received his B.A. and M.A. degrees from the Department of Psychology, Doshisha University, in 1983 and 1985, and received his Ph.D. (System Science) from Tokyo Institute of Technology in 1994, and an additional Ph.D. (Medical Science) from Kitasato University in 2013. He has also worked abroad as a visiting researcher at James Cook University, La Trobe University, and Australian National University (Australia); the Tinbergen Institute (the Netherlands); Gothenburg University and Stockholm University (Sweden); the University of Konstanz (Germany); and National Cheng Kung University (Taiwan). He was also Fulbright Senior Researcher at the Department of Social and Decision Science, Carnegie Mellon University (USA) from 1999 to 2000, and a visiting professor at the Department of Psychology, St. Petersburg State University (Russia) in 2008, at Venice International University (Italy) in 2015. His main research area is human judgment and decision-making, especially the mathematical modeling of preferential judgment and choice. He received a Hayashi Award (Distinguished Scholar) from the Behavior metric Society (in 2002), an Excellent Paper Award from Japan Society of Kansei Engineering in 2003, Book Awards from the Japanese Society of Social Psychology (in 2010) and the Behaviormetric Society (in 2016), a Fellow Award from the International Association of Applied Psychology (in 2018), and Kimura Award, Transdisciplinary Federation of Science and Technology (in 2021). In the course of his career, he has taught extensively on behavioral decision theory at many universities (Waseda University, Tokyo University, Osaka University, University of Tsukuba, Kobe University, Nagoya University, Tokyo Institute of Technology, Gakushuin University, Rikkyo University, Tokyo International University, Kitasato University, Venice International University, St. Petersburg State University, and National Cheng Kung University). Preface to the Second Edition Preface to the First Edition Contents Part I Behavioral Decision Theory and the Idea of It 1 Decision-Making Phenomenon and Behavioral Decision Theory 1 What is Decision-Making? 2 Structure of Preference Relations and Decision-Making Problems 3 Decision-Making and Uncertainty 3.1 Decision-Making Under Certainty 3.2 Decision-Making Under Risk 3.3 Decision-Making Under Uncertainty 4 Approaches to Decision-Making Research and Behavioral Decision Theory References 2 Preference and Preference Structure 1 Preference Relations 1.1 Set Theoretic Framework of Preference 1.2 Ordering and Comparative Judgment 1.3 Various Forms of Comparative Judgments 2 Axiomatic Approach to Preference Relations and Rational Choice 3 Acyclic Preference and Best Option 4 Criteria of Rationality and Weak Order 4.1 Two Criteria of Rationality 4.2 Rational Choice and Weak Order 5 Axiomatic Measurement Theory and Preference Structure 5.1 What is Measurement? 5.2 Uniqueness and Type of Measurement Scale 5.3 Set Theory and Measurement References Part II Preference Reversal Phenomenon and Description of the Phenomenon 3 Ordinal Utility and Preference Reversal Phenomenon 1 What is Utility? 2 Does a Weak Order Empirically Hold? 3 Preference Reversal Phenomenon References 4 Causes of Preference Reversal Phenomenon 1 Summary of the Preference Reversal Phenomenon 2 Explanation Based on Regret Theory that Assumes Intransitivity 3 Explanation Based on a “Deviation from Procedural Invariance” that Does not Assume Intransitivity References 5 Psychology of Preference Reversals and Prominence Hypothesis 1 Prominence Hypothesis and Preference Reversal Phenomenon 2 Contingent Weighting Model 3 Verification Experiments for Contingent Weighting Model 4 Interpretation of Interpret Procedural Invariance: The Scale Compatibility Principle 5 Preference Reversal and Revealed Preference References Part III Expected Utility Theory and Its Counterexamples 6 Expected Utility Theory and Psychology 1 The St. Petersburg Paradox and Expected Utility 1.1 St. Petersburg Paradox 1.2 Solution to the Paradox 1.3 Expected Utility and Risk Attitudes 2 Relevance Between Fechner’s Psychophysics and Logarithmic Utility Function 3 Possible Psychophysical Laws and Utility Function 4 Study of the Measurement of Utility Based on the Expected Utility Theory References 7 Axioms and Counterexamples Expected Utility Theory 1 Decision-Making Under Risk and Premises of Expected Utility Theory 1.1 Review of the Structure of Decision-Making Under Risk 1.2 Redefinition of Gambling 2 Axiomatic System of Expected Utility Theory 2.1 Linear Utility Model 2.2 Theorem of Expected Utility of Von Neumann and Morgenstern 3 Counterexamples of Expected Utility Theory 3.1 The Allais Paradox 3.2 The Ellsberg Paradox References Part IV Decision-Making and Prospect Theory 8 Preference Paradox and Nonlinear Expected Utility Theory 1 Relations Between Independence Axiom and Paradoxes 1.1 Independence Axiom Under Risk 1.2 Independence Axiom Under Uncertainty 2 Non-Additive Probability and Nonlinear Utility Theory 3 The Choquet Integral Model as a Nonlinear Utility Theory Under Uncertainty 3.1 Subjective Expected Utility Model of Anscombe and Aumann 3.2 Schmeidler’s Theorem and the Choquet Integral Model 4 Basic Assumptions of Prospect Theory 4.1 Editing Phase 4.2 Evaluation Phase References 9 Prospect Theory and Decision-Making Phenomena 1 Empirical Research on the Value Function and Reflection Effect 2 Empirical Research on the Value Function and Loss Aversion 3 Empirical Research on Probability Weighting Function 4 Cumulative Prospect Theory 5 Experiments on Cumulative Prospect Theory References 10 The Framing Effect of Decision Making 1 What Type of Phenomenon is the Framing Effect? 2 Why Can Utility Theory not Explain the Framing Effect? 3 Framing in Social Life 4 Framing and Mental Accounting 4.1 Losing a Ticket and Mental Accounting 4.2 Purchasing a Calculator and Mental Accounting 4.3 Hedonic Framing 5 Robustness of the Framing Effect References Part V Framing Effect and Descriptions of It 11 Theories Used to Explain the Framing Effect 1 Using Prospect Theory to Explain the Framing Effect 2 Problems of Prospect Theory 3 Basic Assumptions of the Contingent Focus Model as an Alternative Explanation 4 Mathematical Expressions of Contingent Focus Model 5 Verification Experiment of the Contingent Focus Model References 12 Decision-Making Process 1 Multi-Attribute Decision-Making and Information Search 2 Various Decision Strategies 3 Categories of Decision Strategies 4 How to Identify Decision Strategies 5 Task Dependence of Decision Strategies 6 Emotions and Decision Strategies 7 Justification of Decisions and Process After Decision Making References Part VI Decision-Making Process and Its Theory 13 Behavioral Decision Theories that Explain Decision-Making Processes 1 Dominance Structure Search Model 2 Adaptive Decision-Maker Model 3 Metacognitive Mechanism Model 4 Other Psychological Decision Theories 4.1 Fast and Frugal Heuristics Model 4.2 Decision Field Theory 4.3 Maximizer and Satisficer Model References 14 Decision-Making Process and Neuroeconomics 1 What Is Neuroeconomics? 2 Methodology of Neuroeconomics and Significance as Behavioral Decision Theory 3 Prospect Theory and Neuroeconomics 4 Dual Proceess and Neuroeconomics References 15 Time Descounting and Decision Making 1 What is Time Discounting? 2 Marshmallow Test and Time Discounting 3 Time Discounting for Animals and Humans 4 General Matching Law and Time Discounting 5 Decision-Theoretic Interpretation of General Matching Laws 6 Probability Weighting Functions Derived from Time Discounting Models and Their Empirical Analysis 6.1 Various Probability Weighting Functions Derived from Time Discounting Models 6.2 Empirical Analysis 7 Conclusion and Future Prospects References 16 Preference Formation and Attitude Research 1 Relationship Between Preference Formation and Psychology 2 Attitudes as a Classical Social Psychological Concept Behind Preference Formation 3 Preference Formation Theory in Attitude Research 3.1 Impression Formation Theory 3.2 Balance Theory 3.3 Cognitive Dissonance Theory 3.4 Self-perception Theory 3.5 Inoculation Theory 3.6 Elaboration Likelihood Model 4 Measuring Preferences and Attitudes 4.1 Concept of Preference Formation and Attitude Measurement 4.2 The Measurement of Attitude as a Preference 5 Preference Formation Process in Decision Making 5.1 Construction of Preferences in Decision Making 5.2 Preference Formation According to Contact 5.3 Preference Construction of Decision Makers and Future Prospects References 17 Interpersonal Decision-Making and Happiness 1 Interpersonal Decision-Making 2 Independence Between Individuals and Consequences from Condorcet’s Jury Theorem 3 Group Decision-Making in Situations Where Independence Among Group Members Is not Ensured 4 Various Social Effects of Interactions 4.1 Social Facilitation and Social Inhibition 4.2 Group Processes and Conformity 4.3 Normative and Informational Influences on Conformity 4.4 Obedience 4.5 Macro Consequences of Social Impact 4.6 Impact of Minority on Majority 5 Game Theory and Decision-Making Under Social Interaction 5.1 Strategic Nature of Decision-Making and Game Theory 5.2 Behavioral Decision Theory Representation of Decision Making Under Interaction 6 Decision-Making Behavior and Social Welfare 6.1 Does Money Make People Happy? 6.2 Can Rational People Be Happy? 6.3 Does Strategical Thoughts Lead to Happiness? 6.4 Other-Regarding Preference 6.5 Happiness and the Peak-End Law 6.6 Decision-Making and Purulalstic Values References 18 Toward Good Decisions and Avoiding Bad Decisions 1 Multi-attribute Decision Making and Best Decision 1.1 Best Decision 1.2 Multi-attribute Decision-Making 1.3 Difficulty of Multi-attribute Decision-Making and Its Psychological Cause 2 Weak Order in Multi-attribute Decision-Making 2.1 Making the Best Decision with a Single Attribute 2.2 Theoretical Examination When Multi-attribute Decision-Making Does not Hold Weak Order 3 Impossibility Theorem of Multi-attribute Decision-Making 3.1 Definition of Multi-attribute Value Function 3.2 Consequences of Impossibility Theorem of Multi-attribute Decision-Making 3.3 Rethinking of Weak Order in Multi-attribute Decision-Making 4 Multi-attribute Decision-Making and Multi-objective Optimization 4.1 Multi-objective Optimization 4.2 Multi-attribute Decision-Making and Additive Conjoint Structure 5 Descriptive Analysis of Multi-attribute Decision-Making and the Psychology and Inclination for One Dimension in Decision-Making 5.1 Scale of Decision Strategy and Multi-attribute Decision-Making 5.2 Mental Ruler Model in Multi-attribute Decision Making 6 Focusing Attention on the Causes of One-Dimensional Decision-Making and “Good Decision-Making” 7 Towards Good Decisios and Avoiding Bad Decisions 7.1 Decision-Making Under Value Pluralism 7.2 Nudging and Boosting as Prescriptive Decision Making 7.3 Decision Making Under Ignorance References Author Index Subject Index