Descriptive decision-making

Definition

Descriptive decision-making refers to the process of understanding how individuals actually make choices, often influenced by psychological biases and heuristics. It contrasts with normative decision-making, which focuses on how decisions should be made logically and rationally. In practice, descriptive decision-making reveals the cognitive shortcuts people take, such as using availability and representativeness heuristics to simplify complex choices and deal with uncertainty.

5 Must Know Facts For Your Next Test

1. Descriptive decision-making highlights that people often rely on heuristics instead of thorough analysis, leading to biases in their choices.
2. Availability heuristic refers to making decisions based on information that is most readily available in memory, often influenced by recent experiences.
3. Representativeness heuristic involves judging the probability of an event based on how closely it resembles a typical case, which can lead to misjudgments.
4. People's decisions can be swayed by emotional factors and framing effects, where the context in which information is presented influences their choices.
5. Descriptive decision-making helps explain why individuals might make irrational choices despite having access to all necessary information.

Review Questions

• How does descriptive decision-making contrast with normative decision-making in terms of individual choice processes?
  • Descriptive decision-making focuses on understanding the actual behaviors and thought processes individuals use when making decisions, often influenced by biases and heuristics. In contrast, normative decision-making is concerned with the idealized way decisions should be made based on logic and rationality. This distinction highlights the gap between theoretical models of decision-making and the real-world complexities faced by individuals.
• Discuss how the availability heuristic affects descriptive decision-making and provide an example.
  • The availability heuristic impacts descriptive decision-making by causing individuals to rely on immediate examples that come to mind when evaluating probabilities or making judgments. For instance, after seeing news reports about airplane accidents, a person might overestimate the risks of flying due to the vividness and accessibility of that information. This leads them to make decisions based on recent memories rather than accurate statistical data about flight safety.
• Evaluate the implications of descriptive decision-making for financial markets and investor behavior.
  • Descriptive decision-making has significant implications for financial markets as it reveals how cognitive biases and heuristics influence investor behavior. For example, investors may overreact to recent market trends due to the availability heuristic, leading to price bubbles or crashes. Understanding these behaviors allows financial professionals to better anticipate market movements and devise strategies that account for human psychology rather than purely rational models, ultimately affecting investment outcomes and market efficiency.

Related terms

Cognitive Bias: A systematic pattern of deviation from norm or rationality in judgment, leading to illogical conclusions or decisions.

Heuristics: Mental shortcuts that ease the cognitive load of making a decision, often based on previous experiences or immediate examples.

Prospect Theory: A behavioral economic theory that describes how people choose between probabilistic alternatives that involve risk, highlighting how they value potential losses and gains.