Economics and psychology. The framing of decisions

Schilirò, Daniele (2016): Economics and psychology. The framing of decisions. Published in: Journal of Mathematical Economics and Finance , Vol. II, No. 2(3) (December 2016): pp. 77-88.

Abstract

In the Theory of Rational Decision Making the psychological aspects are set aside. This contribution seeks to point out the relevance of psychology into economic decisions. The essay treats the "framing of decisions", which is a pillar of Kahneman's behavioral theory. Framing must be considered a special case of the more general phenomenon of dependency from the representation. The best-known risky choice-framing problem, i.e. the "Asian Disease Problem", is shown where an essential aspect of rationality: invariance, is violated. In addition, the contribution explains Kahneman and Tversky's Prospect Theory and illustrates their value function. Finally, it discusses the reversals of preference in framing and framing of contingencies. The framing manipulation is viewed as a public tool for influencing the decision maker's private framing of the problem in terms of gains or losses, which determines the decision maker's evaluation of the options. In conclusion, the psychology of choice is relevant both for the descriptive question of how decisions are made and for the normative question of how decisions ought to be made.

• Item Type: MPRA Paper
• Language: English
• Keywords: Behavioral Economics; Framing of Decisions; Prospect Theory; Daniel Kahneman.
• Subjects: D - Microeconomics > D0 - General > D01 - Microeconomic Behavior: Underlying Principles; D - Microeconomics > D0 - General > D03 - Behavioral Microeconomics: Underlying Principles; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty

References

Allais, M. (1953). "Le comportement de l'homme rationnel devant le risque: critique des postulats et axiomes de l'école Américaine". Econometrica, Vol. 21, No.4, pp. 503–546.

Arrow, K. (1982). Risk Perception in Psychology and Economics, Economic Inquiry, Vol. 20, No. 1, pp.1-9.

Friedman, M. and Savage, L. (1948). The Utility Analysis of Choices Involving Risk, Journal of Political Economy, Vol. 56, No. 4, pp. 279-304.

Friedman, M. and Savage, L. (1952). The Expected-Utility Hypothesis and the Measurability of Utility, Journal of Political Economy, Vol. 60, No. 6, pp. 463-474.

Kahneman, D. (2002). Maps of Bounded Rationality: A Perspective on Intuitive Judgment and Choice, Prize Lecture, December 8, 2002, pp.1-41.

Kahneman, D. and Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk, Econometrica, Vol. 47, No. 2, pp. 263-292.

Kahneman, D. and Tversky, A. (1981). The Framing of Decisions and the Psychology of Choice, Science, New Series, Vol. 211, No. 4481, pp. 453-458.

Rabin, M. (1998). Psychology and economics, Journal of Economic Literature, Vol. 36, No.1, pp. 11-46

Savage, L. (1954). The Foundation of Statistics, Hoboken, NJ, Wiley.

Schilirò, D. (2012). Bounded Rationality and Perfect Rationality: Psychology Into Economics, Theoretical and Practical Research in Economic Fields, No. 2, pages 101-111.

Tversky, A. and Kahneman, D. (1986). Rational Choice and the Framing of Decisions, The Journal of Business, Vol. 59, No.4, pt.2, pp. 251 – 278.

Von Neumann, J. and Morgenstern, O. (1944). Theory of Games and Economic Behavior, Princeton, Princeton University Press.