Decision Making Under Risk and Uncertainty!
This week’s topic was on decision making under risk and uncertainty. In class we had to find our personal point of indifference in making a decision between a choice that is certain and a choice that would be taking a risk. I always thought of myself as someone who would take risks, however I found that in class I went for the certain choice. We looked at theories and the Allais Paradox was the one I found most interesting where you have a choice between A and B. A£I,000,000 for sure or B. 10% Chance of getting £5,000,000 and 89% chance of getting £1,000,000 and 1% chance of getting £0. I chose A for certain.
I believe that decision making is evident in nearly everything we do. From the everyday to the consequential, our lives are governed from the decisions that we take. Therefore it is difficult to understand the factors about how we make decisions. When understanding decisions you need to understand and be aware of how various factors may have had an influence on past decisions, and so that we may be able to improve upon future decisions.
Because decision making is so central to our lives, it is not surprising that it receives research
attention from a wide range of disciplines: cognitive psychology, economics, political science, marketing, social psychology, engineering, philosophy, and more. I therefore have come to the conclusion that I myself tend not to take too many risks when making a decision.
In relation to what you've said in the first paragraph here, it is of course open to question as to whether assessing risk attitudes using these financial scenarios will actually generalise to other domains. Could it be the case that someone who always chooses the sure thing in a financial choice might actually be a daredevil when it comes to snowboarding or racing motorbikes?
ReplyDeleteYour second paragraph is all a bit general, if I may say so ("decision making is evident in nearly everything we do..." - Yes!)
David