Essay on The Expected Utility Theory Coined By David Neumann And Morgenstern

Essay on The Expected Utility Theory Coined By David Neumann And Morgenstern

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For more than 60 years ago, the standard and most popular of the decision-making theories was the expected utility theory coined by (Neumann and Morgenstern, 1947). Their idea was that humans are rational who compares gains and losses against each other and calculates this with the different probabilities of each outcome. However, it is reasonable to argue that the idea that all data is gathered for every possible alternative and every outcome, without compromise, is a bit too optimistic.
The business-word is complex where many parameters have to be correctly judged and sufficiently decided upon in an often a short period of time. Chugh suggested (as cited in Bazerman & Moore, 2012) that most managers often rely on the so-called System 1 thinking, which is an intuitive system that humans use to automatically interpret visual and verbal information. When there is a more major and complex decision to make however, (Kahneman, 2003) refered to System 2 as reasoning that is more analytic and logical, hence more appropriate in slower processes.
Even though people rely on these systems in situations ranging from everyday decision-making to important business decisions, researchers shows that even the cleverest people often have errors in their judgement (Bazerman & Moore, 2012). Errors (or biases) are predominantly occurring in System 1 thinking. But due to the fact System 1 thinking works in synergy with System 2, both systems, and consequently human’s cognitive functioning, will have the flaws called biases.
(Tversky and Kahneman, 1974) uncharted important data on specific systematic biases that influence judgement and decision-making. These biases were described as rules of thumb, which is ”simplifying strategies” for making decis...


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...e of the environment” which support the importance of the environment where any heuristics’s effectiveness are evaluated.


Conclusion
Being rooted in human’s cognitive function, heuristics and biases naturally exists in human’s behaviour when making decisions and judgements as argued by (Bazerman & Moore, 2012). It is therefore reasonable to argue that this implies a fundamental inclination to make suboptimal judgements and decisions in everyday-life and business. However, for a more balanced argument, it would be more appropriate to include the notion that the situation, or the environment determines whether or not a bias is good or bad as seen in (Gigerenzer G and Gaissmaier W, 2011). The substantiated view is therefore that the rationality or irrationality of a heuristic or bias; their accuracy, depends on the situation, the people involved and the environment.

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