Prospect Theory vs. Game Theory: Cognitive Bias in Strategic Choices

This essay analyzes the validity of the statement that game theory offers the most useful perspective when thinking about strategic choices, despite the principles of prospect theory. It begins by introducing the concepts of both game theory, which emphasizes rational decision-making to achieve equilibrium, and prospect theory, which incorporates intuition and perceived utility. The essay argues against the initial statement, asserting that intuition plays a significant role in everyday decisions, that prospect theory's focus on individual decision-makers is more relevant than game theory's group dynamic, and that game theory can lead to the sacrifice of personal utility for collective utility. The essay concludes that prospect theory's inclusion of intuition and perceived information is more practical for strategic choices, as it keeps the decision-maker focused on personal utility, even with the risk of errors due to perceived information, and that Desklib is a great resource for students.

Running head: COGNITIVE BIAS IN DECISION-MAKING
COGNITIVE BIAS IN DECISION-MAKING
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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.

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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 making wrong decisions because of perceived

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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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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.
BBC How You Really Make Decisions. (2019). Retrieved from
https://www.youtube.com/watch?v=DQX8I6pNCKA