Summary ECH-31306
Lecture 1 – views on decision making
Economics and psychology are as water and fire.
Economics Psychology
Assumptions about human behaviour Research about human behaviour
Aggregated behaviour Individual behaviour
Normative theory Descriptive theory
Deviation (anomalies) from theory ‘Separate theories’ (occasional theories) for
deviations
Assumptions of economic theory:
- Complete information about choice alternatives (market transparency)
- Correct calculation of utility of combinations
- Individualism, self-interest
- Knowledge about short-term and long-term utility
- Stable preferences
- Maximisation or optimisation of utility
- No role for emotion
Decisions are important since resources are limited. To adjust to one’s environment and
since they may have a large influence on both an individual’s happiness and society. A
decision is:
- Ordering a meal in a restaurant
- Starting a consultancy firm
- Not quitting smoking
- Solving a math problem
- Inventing a new type of bicycle
- Grading an exam
- Innovation
“.. a decision is defined as a movement in an ongoing process of evaluating alternatives for
meeting an objective, at which expectations about a particular course of action impel the
decision maker to select that course of action most likely to result in attaining the objective.”
Important distinctions:
- What is the difference between judgement and decision-making?
- What is the difference between problem-solving and decision-making?
- What is the difference between a decision and decision-making?
Judgement: the cognitive part of decision making. “A judgement requires a choice to become
a decision”.
Problem-solving: “problem-solving may or may not require action”.
Decision: one moment in a larger process of decision-making. When alternative are
evaluated and lead to selection of one alternative. In a decision there is an aim for a specific
goal and eventually it will lead to action.
Decision making: is the whole process of making a decision. This process contains different
steps.
1. Gathering information:
Lecture 1 – views on decision making
Economics and psychology are as water and fire.
Economics Psychology
Assumptions about human behaviour Research about human behaviour
Aggregated behaviour Individual behaviour
Normative theory Descriptive theory
Deviation (anomalies) from theory ‘Separate theories’ (occasional theories) for
deviations
Assumptions of economic theory:
- Complete information about choice alternatives (market transparency)
- Correct calculation of utility of combinations
- Individualism, self-interest
- Knowledge about short-term and long-term utility
- Stable preferences
- Maximisation or optimisation of utility
- No role for emotion
Decisions are important since resources are limited. To adjust to one’s environment and
since they may have a large influence on both an individual’s happiness and society. A
decision is:
- Ordering a meal in a restaurant
- Starting a consultancy firm
- Not quitting smoking
- Solving a math problem
- Inventing a new type of bicycle
- Grading an exam
- Innovation
“.. a decision is defined as a movement in an ongoing process of evaluating alternatives for
meeting an objective, at which expectations about a particular course of action impel the
decision maker to select that course of action most likely to result in attaining the objective.”
Important distinctions:
- What is the difference between judgement and decision-making?
- What is the difference between problem-solving and decision-making?
- What is the difference between a decision and decision-making?
Judgement: the cognitive part of decision making. “A judgement requires a choice to become
a decision”.
Problem-solving: “problem-solving may or may not require action”.
Decision: one moment in a larger process of decision-making. When alternative are
evaluated and lead to selection of one alternative. In a decision there is an aim for a specific
goal and eventually it will lead to action.
Decision making: is the whole process of making a decision. This process contains different
steps.
1. Gathering information:
