This essay analyzes and evaluates the validity of the statement, “Despite the principles of prospect theory, game theory offers the most useful perspective when thinking about strategic choices.” The essay systematically analyzes both of the theories’ principles and provides arguments for or against the statement.
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Running head:COGNITIVE BIAS IN DECISION-MAKING COGNITIVE BIAS IN DECISION-MAKING Name of the Student: Name of the University: Author Note:
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1COGNITIVE BIAS IN DECISION-MAKING COGNITIVE BIAS IN DECISION-MAKING People think that the best way to decide on certain situations and problems is by critical thinking and rationale. However, a BBC documentary titled “How You Really Make Decisions” points out that this is rarely the case. The documentary suggests that even though it is in the best interests of people that they use their rationale in decision making processes, they are highly driven by their intuitions instead("BBC How You Really Make Decisions", 2019). While the game theory of decision making involves rationale, the prospect theory involves intuitions. The purpose of this essay is to analyse and evaluate the validity of the statement,“Despite the principles of prospect theory, game theory offers the most useful perspective when thinking about strategic choices.” This will be done by systematically analyzing both of the theories’ principles and providing arguments for or against the statement. Telser (2019) explains the principles of game theory. He suggests that every situation that needs a solution is a game, where decision makers, who are the players in the game interact with each other in decision making to arrive at an agreement or equilibrium. Strategy involves the action plan of each of the players, during the various circumstances of the game, pertaining to the information sets in the game. Players will seek actions based on the results which to them are of the highest utility. In other words, decision makers will use their rationales against the others to arrive at an equilibrium which is of common utility of the players as a result of strategic decision making. It is a mathematical model, and is based completely on logic, which makes this theory support critical thinking for decision making processes.
2COGNITIVE BIAS IN DECISION-MAKING The prospect theory on the other hand takes intuition into account for decision making processes. This theory also takes the utility factor into account but states that decision makers tend to analyze in an intuitive manner regarding the possible outcomes of a choice of action to arrive at their decisions. According to Ebert and Strack (2015), this makes them vulnerable to making wrong decisions since they are prone to their own assumptions about the utility of each of the choices. Most of these times, these intuitions do not work, and the result of the decision might not be fruitful to the decision-maker. The statement which this essay refers to, is actually untrue. There are three specific arguments to oppose the statement. Firstly, intuition plays a bigger role in a person’s everyday life than logic does. As the BBC documentary points out, the part of the brain which works based on logic, is a tardy one and is lazy. It requires acute attention to detail in order to work, and is subject to any other minute simultaneous task that the person might be doing. Secondly, the game theory takes various decision makers in a decision making process into account in order to arrive at an equilibrium of utility. Prospect theory considers a single individual as a decision maker. This makes more sense since the majority of the decisions which people take, are personal decisions and not group decisions. Even in group decisions, the basis of decision making involves the philosophy of the organization. Lastly, the game theory involves a set of players in the decision making process, which makes the conflicting perspective of utility of the players disrupt the ideal unidirectional flow of the decision making process. Hence, personal utility is sacrificed for collective utility. To further assert the above arguments, Jack S. Levy (1997) points out that prospect theory holds more potential than game theory as far as strategic choice making is concerned. This according to Levy, is because intuitions and the urge for attaining maximum utility keeps the decision maker within the framework of making the correct decisions for himself, even if it puts him under the risk of makingwrong decisionsbecause of perceived
3COGNITIVE BIAS IN DECISION-MAKING information instead of analyzed information. He argues that staying within this framework to be able to make decisions is better than deciding for a situation in which there are chances of not arriving at an equilibrium at all. He also points out that utility of each player’s interest is not always the utility which a single player seeks. From this essay, it can be deducted that although game theory considers the most important component of decision making (logic) as a part of decision making, prospect theory’s inclusion of intuition and perceived information makes more sense when thinking of strategic choices. This is because intuition and personal perception of utility keeps a person within the framework of decision making, while in game theory, there are probabilities of null equilibrium, as well as sacrificing personal utility for shared utility.
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4COGNITIVE BIAS IN DECISION-MAKING References Levy, J. S. (1997). Prospect theory, rational choice, and international relations.International studies quarterly,41(1), 87-112. Telser, L. G. (2017).Competition, collusion, and game theory. Routledge. Ebert, S., & Strack, P. (2015). Until the bitter end: on prospect theory in a dynamic context. American Economic Review,105(4), 1618-33. BBCHowYouReallyMakeDecisions.(2019).Retrievedfrom https://www.youtube.com/watch?v=DQX8I6pNCKA