Rational choice and ' Framing effect' and Desicions

     

The major theory of Decision-making under risk is the expected utility model. This model is based on the set of axioms, for example transitivity of preferences, which provide criteria for the rationality of choices. The choices of an individual who conforms to the axioms can be described in terms of utilities of the utilities of various outcomes for that individual. The utility of a risky prospect is equal to the expected utility of its outcomes, obtained by weighting the utility of each possible outcome by its probability. When faced with a choice, rational decision maker will prefer the prospect that offers the highest expected utility (Kahneman & Tversky 1981).However, we need to consider the importance of how the highest expexted utility is presented to us.

 Framing is a cognitive heuristic in which people tend to reach conclusions based on the 'framework' within which a situation was presented.

How does framing effect our decisions? 

A “framing effect” is usually said to occur when equivalent descriptions of a decision problem lead to systematically different decisions. The study of ‘framing effect’ on decisions, led by Benedetto De Martino and Raymond Dolan of University College London, found that participant’s decisions varied due to the framing of the gamble offer.  They used the screen offering two choices. One option was a sure thing, such as "Keep £20" or "Lose £30." The other option was an all-or-nothing gamble. The odds of winning--shown to the subjects as a pie chart--were rigged to provide the same average return as the sure option. In interviews after the experiment, participants said they'd quickly realized that the sure and gamble options were equivalent, and most said that they had split their responses 50-50 between the two choices. But they hadn't. When the sure option was framed as a gain (as in "Keep £20"), subjects played it safe, gambling only 43% of the time on average. If it was framed as a loss, however, they gambled 62% of the time. Thus, individuals' decisions may be altered through manipulation with the framing effect, and the consequences of framing effects may be unavoidable.