DECISION SCIENCE

11.4

Summary

In this chapter, you gained insights into several crucial trends in the field of decision sciences. These include Pascal’s expected value theory, Bernoulli’s expected utility theory, and Tversky and Kahneman’s prospect theory. Additionally, you delved into the importance of prospect theory and how it has shaped policies and real-world results.

You learned Pascal’s expected value theory, which calculates the anticipated outcome by multiplying its value (e.g., a sum of money) with the probability of occurrence.

A century later, Bernoulli expanded on Pascal’s theory, introducing his own concept. He proposed that expected utility results from multiplying the utility of an outcome with its probability. Expected utility is not just a linear function of monetary outcomes; it factors an individual’s wealth relative to potential outcomes.

Prospect theory resembles a neo-Bernoullian approach, but it introduces distinct insights into outcome valuation. It distinguishes between gains and losses in its value function and treats small and large probabilities differently.

The impact of prospect theory on policy, science, and management cannot be overstated. Yet, it is not immune to critique. The replication crisis in psychology has cast doubt on its validity. Some researchers believe that a failure to replicate prospect theory could profoundly impact decision science. Others argue that various theories yield similar predictions and should not overly prioritize prospect theory.

In conclusion, the jury is still out on prospect theory.