Prospect Theory and due process paranoia: what behavioural models say about arbitrators’ assessment of risk and uncertainty

2020 ◽  
Vol 36 (2) ◽  
pp. 233-252
Author(s):  
Rutger Metsch ◽  
Rémy Gerbay
Keyword(s):  
Decision Making ◽  
Prospect Theory ◽  
Due Process ◽  
Decision Makers ◽  
Risk And Uncertainty ◽  
Optimal Decisions ◽  
Arbitral Award ◽  
Decisions Under Risk ◽  
Behavioural Model ◽  
Low Probability

Abstract The term ‘due process paranoia’ is used to describe a perceived reluctance by arbitral tribunals to act decisively in certain situations for fear of the arbitral award being challenged on the basis of a party not having had the chance to present its case fully. This article approaches due process paranoia from the perspective of Prospect Theory, which is a behavioural model describing how individuals make decisions under risk and uncertainty. The authors examine how Prospect Theory’s insight that decision makers tend to overweight low-probability events in their decision-making (the ‘possibility effect’) affects decision-making by arbitrators when faced with the threat of challenge to their awards on due process grounds (the ‘enforcement risk’). The article concludes that the possibility effect is prone to contribute to an overweighting by arbitrators of the enforcement risk, thereby explaining the perceived tendency by tribunals to make sub-optimal decisions when faced with due process-related complaints or threats.

scholarly journals Using Insights from Prospect Theory to Enhance Sustainable Decision Making by Agribusinesses in Argentina

2018 ◽  
Vol 10 (8) ◽  
pp. 2693 ◽  
Author(s):  
Jimena Gonzalez-Ramirez ◽  
Poonam Arora ◽  
Guillermo Podesta
Keyword(s):  
Decision Making ◽  
Prospect Theory ◽  
Land Tenure ◽  
Decision Makers ◽  
Statistical Testing ◽  
Bottom Line ◽  
Corporate Managers ◽  
Perceptions Of Risk ◽  
Decisions Under Risk ◽  
Gains And Losses

Farm production often involves family-owned agribusinesses where decisions are made by households or individuals, not corporate managers. As these decisions have important economic, environmental, and social implications, decision-making processes must be understood to foster sustainable agricultural production. Decision experiments, involving lotteries, targeting farmers in the Argentine Pampas were used to estimate prospect theory (PT) parameters. Results suggest that decisions under risk are better represented by prospect theory than by expected utility (EU) theory: Decision makers treat gains and losses differently and use subjective probabilities of outcomes; they are quite loss averse and are more likely to overweigh probabilities of infrequent events, such as large droughts or floods. Statistical testing revealed heterogeneity in the risk tied to land tenure (land owners vs. renters) and agribusiness roles (farmers vs. technical advisors). Perceptions of risk, probability, and outcomes played a large role in the sustainability of production. Due to a strong desire to avoid losses, decision makers have a greater short term focus: Immediate economic outcomes are more salient, and environmental and social investments are framed as costs rather than long-term gains. This research can help design policies, programs, and tools that assist agribusinesses in managing better contradictions across the triple bottom line to ensure greater sustainability.

Decision-making of investment in navigation safety improving schemes with application of cumulative prospect theory

2018 ◽  
Vol 232 (6) ◽  
pp. 710-724 ◽  
Author(s):  
Lei Wang ◽  
Qing Liu ◽  
Tongle Yin
Keyword(s):  
Decision Making ◽  
Prospect Theory ◽  
Investment Decision ◽  
Cumulative Prospect Theory ◽  
Decision Makers ◽  
Investment Decision Making ◽  
Risk Appetite ◽  
Safety Investment ◽  
Navigation Safety

Navigation safety improving investment aims at mitigating risk and improving safety of shipping system, while decision-makers’ attitudes toward the uncertainty of shipping safety possess a characteristic of “bounded rationality.” To study the tendency of shipping safety investment decision-making with different risk perception and appetite, a decision-making method based on cumulative prospect theory is proposed in this article. First, we extract the decision attributes through analyzing the factors affecting shipping safety investment. Then, according to cumulative prospect theory, the value function and the probability weighting function for calculating cumulative prospect values of shipping investment attributes are given. Under the risk-based multi-attribute group decision-making framework, linear programming model and projection method are introduced to aggregate the weights of attributes and decision-makers, respectively. Furthermore, through a case study, the proposed methodology is utilized in Three Gorges Dam area, and the desirable safety investment scheme is determined from a set of candidate alternatives. The case study shows not only validity and feasibility of the decision-making approach but also the mechanism of shipping safety investment decision-making with consideration of the behavior characteristics of decision-makers such as reference dependence, risk appetite distortion, and loss aversion.

scholarly journals Making management decisions in conditions of risk and uncertainty

KANT ◽  
2020 ◽  
Vol 37 (4) ◽  
pp. 106-109
Author(s):  
Diana Kenina ◽  
Olga Zvyagintseva ◽  
Ludmila Khripkova
Keyword(s):  
Decision Making ◽  
Comparative Analysis ◽  
External Environment ◽  
Research Topic ◽  
Decision Makers ◽  
Strategic Decision ◽  
Risk And Uncertainty ◽  
Mathematical Methods ◽  
Management Decisions ◽  
Modern Economic

The relevance of the research topic is due to the fact that today, in rapidly changing conditions, primarily the external environment, managers as strategic decision-makers need special skills for prompt and competent decision-making. The article contains research, as well as a comparative analysis of modern economic and mathematical methods for developing and making management decisions, and recommendations for their application in practice. Along with the theoretical and methodological significance, the work has a pronounced practical orientation, and is of interest to specialists in the field of Economics and management

Self–Other Differences in Decision-Making Under Risk

2018 ◽  
Vol 65 (4) ◽  
pp. 226-235 ◽  
Author(s):  
Jingyi Lu ◽  
Xuesong Shang ◽  
Bingjie Li
Keyword(s):  
Decision Making ◽  
Decision Makers ◽  
Risk Averse ◽  
Emotional States ◽  
Decision Making Under Risk ◽  
Behavioral Consequences ◽  
Decisions Under Risk ◽  
Decisions For Others ◽  
Interpersonal Concerns ◽  
Risky Decisions

Abstract. Decisions made for others reflect not only decision-makers’ cognitive and emotional states but also decision-makers’ interpersonal concerns. People who make choices for others will potentially be blamed for unappealing outcomes by others. Therefore, we hypothesize that individuals will seek sure gains (which increase individuals’ responsibility for desirable outcomes) and avoid sure losses (which decrease individuals’ responsibility for undesirable outcomes) when making risky decisions for others more than when making such decisions for themselves. The results of two studies show that making decisions for others (vs. oneself) promotes risk-averse choices over gains. This effect may be driven by the perceived responsibility associated with different options. When both options exhibit variance in outcomes, such self–other difference disappears. However, no self–other difference over losses was observed. Taken together, our research highlights interpersonal concerns in making decisions for others, as well as the behavioral consequences of these concerns in decisions under risk.

Decision Making under Risk and Uncertainty in the Oil and Gas Industry

2017 ◽  
pp. 181-207
Author(s):  
Christopher Boachie
Keyword(s):  
Decision Making ◽  
Oil And Gas ◽  
Focal Point ◽  
Oil And Gas Industry ◽  
Energy System ◽  
Risk And Uncertainty ◽  
Decision Making Under Risk ◽  
Gas Industry ◽  
Decisions Under Risk ◽  
Oil And Gas Companies

The energy system studies include a wide range of issues from short term to long term horizons. The decision making chain is fed by input parameters which are usually subject to uncertainties. The art of dealing with uncertainties has been developed in various directions and has recently become a focal point of interest. Decision making is certainly the most important task of Oil and Gas managers and it is often a very difficult one. The purpose of this chapter is to review and investigate the decision making processes under risk and uncertainty of Oil and Gas companies. Questionnaires were distributed to eight Oil and Gas companies in Ghana to solicit their view on decision making under risk and uncertainty. Results indicate that most managers use Maximax, Minimax Regret and Expected Value when making decisions under risk and uncertainty.

5. Risky choices

2017 ◽  
pp. 49-66
Author(s):  
Michelle Baddeley
Keyword(s):  
Decision Making ◽  
Prospect Theory ◽  
Expected Utility Theory ◽  
Mental Accounting ◽  
Lottery Ticket ◽  
Risk And Uncertainty ◽  
The Road ◽  
Risky Choices ◽  
Accounting Model ◽  
Isolation Effects

When we decide to cross the road, buy a lottery ticket, or invest our money, the decision involves risk and uncertainty. ‘Risky choices’ looks at how economists usually think of risk as quantifiable—in the form of expected utility theory—but behavioural economists challenge this understanding of risk. Daniel Kahneman and Amos Tversky developed prospect theory, which could incorporate the anomalous behaviour identified by the Allais and Ellsberg Paradoxes. They argued that any decision-making theory should be able to explain the certainty, reflection, and isolation effects. Alternatives to prospect theory include Richard Thaler’s mental accounting model and the regret theory of Graham Loomes and Robert Sugden.

Adapting to climate change and managing climate risks by using real options

2007 ◽  
Vol 58 (10) ◽  
pp. 985 ◽  
Author(s):  
Greg Hertzler
Keyword(s):  
Climate Change ◽  
Real Options ◽  
Decision Makers ◽  
Community Leaders ◽  
Catchment Management ◽  
Decision Diagrams ◽  
Climate Risks ◽  
Optimal Decisions ◽  
Decisions Under Risk ◽  
New Type

Adapting to climate change and managing climate risks are new challenges for farmers, community leaders, and catchment management authorities. To meet this challenge, a new method of making decisions under risk may help. This method is called real options. It begins with common sense and adds rigour. It helps us decide when to keep our options open and when to foreclose options and create new ones. In this paper, real options are explained and applied to several examples by developing a new type of decision diagram. The diagrams are a language for thinking about complex decisions under risk. Farmers, community leaders, and catchment management authorities can develop similar diagrams and use them to communicate with other decision makers and with researchers. Finally, the decision diagrams are related to new mathematical tools to help find optimal decisions for managing climate risks.

scholarly journals Decision-Making for Fire Emergency of Urban Rail Transit Based on Prospect Theory

2021 ◽  
Vol 2021 ◽  
pp. 1-10
Author(s):  
Yuning Wang ◽  
Yingzi Liang ◽  
Hui Sun ◽  
Yufei Yang
Keyword(s):  
Decision Making ◽  
Prospect Theory ◽  
Emergency Response ◽  
Urban Rail Transit ◽  
Decision Makers ◽  
Response Analysis ◽  
Rail Transit ◽  
Emergency Plans ◽  
Urban Rail ◽  
Property Losses

Fire emergency response of urban rail transit is a complex multiattribute risk decision-making problem. In emergency response analysis, it is necessary to consider the psychological behaviors of decision-makers such as reference dependence, loss aversion, and judge distortion. Applying different emergency plans can intervene the development and evolution of urban rail emergency fire and may even result in different levels of casualties and property losses. For this situation, this paper proposes an emergency response decision-making method based on prospect theory. First, according to the prospect theory, this paper quantitatively describes the comprehensive psychological perception of decision-makers for casualties and property losses in different situations. Then, the psychological perception of decision-makers for the important levels of different situations is calculated. Third, according to the situation comprehensive values, situation weights, and the cost inputs of emergency plans, the comprehensive prospect values of each emergency plan are calculated, and the fire emergency plans can be ranked based on comprehensive prospect value. At last, the fire emergency disposal of Tianjin rail transportation line 3 is considered as the background in this paper. The feasibility and effectiveness of the purposed method is illustrated through the case study.

Prospect Theory and Political Decision-Making

2019 ◽  
Author(s):  
Janice Gross Stein ◽  
Lior Sheffer
Keyword(s):  
Decision Making ◽  
Foreign Policy ◽  
Prospect Theory ◽  
Group Dynamics ◽  
Domestic Politics ◽  
Probability Distributions ◽  
Decision Makers ◽  
Political Decision ◽  
The Impact ◽  
Political Decision Making

Prospect theory has been adopted unevenly across different domains of political decision-making. Research drawing on prospect theory has contributed to important advances in the understanding of processes of elite decision-making in foreign policy and domestic politics. Political scientists have also contributed several important extensions of and qualifications to prospect theory that augment the original theoretical framework and are applicable in other disciplines. The next wave of research needs to be far more careful in specifying the scope conditions that have been the focus of research in behavioral economics. Scholars will also have to pay closer attention to the distribution of probability estimates across options; whether political decision makers are choosing among risky/certain bimodal distributions, high-probability distributions, high/low distributions, or low-probability distributions matters to the predicted impact of framing effects. Finally, studies will need to pay greater attention to the information political decision makers are given and to the impact of group dynamics in political settings. Identifying the scope conditions of prospect theory in the context of political and policymaking processes over time can make a significant contribution to the explanation of both domestic and foreign policy decisions, fill a gap between individual-level choice and institutionally based outcomes, and provide a stronger behavioral foundation for understanding the dynamics of multiactor policy choice.

Probability Dominance

2020 ◽  
Vol 102 (5) ◽  
pp. 1006-1020
Author(s):  
Enrico Diecidue ◽  
Haim Levy ◽  
Moshe Levy
Keyword(s):  
Decision Making ◽  
Prospect Theory ◽  
Expected Utility ◽  
Cumulative Prospect Theory ◽  
Economic Consequences ◽  
Regret Theory ◽  
Decisions Under Risk ◽  
Set Up ◽  
Winner Take All ◽  
Probability Dominance

The most commonly employed paradigms for decision making under risk are expected utility, prospect theory, and regret theory. We examine the simple heuristic of maximizing the probability of being ahead, which in some natural economic situations may be in contradiction to all three of the above fundamental paradigms. We test whether this heuristic, which we call probability dominance (PD), affects decisions under risk. We set up head-to-head situations where all preferences of a given class (expected utility, original or cumulative prospect theory, or regret theory) favor one alternative yet PD favors the other. Our experiments reveal that 49% of subjects' choices are aligned with PD in contradiction to any form of expected utility or prospect theory maximization; 73% are aligned with PD as opposed to preferences under risk aversion and under original and cumulative prospect theory preferences; and 68% to 76% are aligned with PD contradicting preferences under regret theory. We conclude that probability dominance substantially affects choices and should therefore be incorporated into decision-making models. We show that PD has significant economic consequences. The PD heuristic may have evolved through situations of winner-take-all competition.

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