© E. Falkiewicz. Article available under the CC BY-SA 4.0 licence
ARTICLE
ABSTRACT
This study outlines the decision-making process under risk considering the psychological aspects of the decision-maker. The aim is to construct a principle of an optimal decision for an individual decision-maker. The study considers a finite, d iscrete s et o f a cceptable decisions, a set of possible world states and a system of probabilities of these states (where the probabilities are either known or subjectively estimated by the decision-maker), and a utility matrix of making each decision in particular world states. The proposed process of optimizing the decision addresses not only the rationality of the person making but also emotional aspects of the person making the decision. Rationality is represented by the value of the utility function of the benefits resulting from making a decision in a possible world state. The behavioral part of the model involves two emotions important to decision-making: regret over making a decision that brought less utility than possible in the given conditions and satisfaction with the choice which proved better than the worst option. The first e motion is represented by the regret function and the other by the satisfaction function. New notions are defined: relative utility and expected relative utility of particular decisions used to construct the principle of an optimal decision under risk.
The presented theory thus supplements the prospect theory, as it accounts for regret and satisfaction in the decision-making process under risk. This idea is part of behavioral economics, yet not standing in opposition to classical economics. Its advantage is that it considers both psychological and rational factors in the decision-making process.
KEYWORDS
utility function, prospect theory, decisions under risk, regret function, satisfaction function, expected relative utility
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