Academic journal article E - Journal of Social & Behavioural Research in Business

Economic Decision Making and Theoretical Frameworks: In Search of a Unified Model

Academic journal article E - Journal of Social & Behavioural Research in Business

Economic Decision Making and Theoretical Frameworks: In Search of a Unified Model

Article excerpt

Introduction

Economics has as a prime concern the imperative to explain and predict decision making behaviour at the macro and micro levels of activity within society. Theoretical models have arisen and form the basis of the extensive literature in the discipline of economics. For example, the Capital Assets Model (CAPM) exemplifies a model which is prescriptive in terms of the mathematical application for determining behaviour. By contrast the Efficient Markets Hypothesis exemplifies a model which seeks to explain the behaviour in respect of markets in different states of existence. A body of research abounds in the economic literature addressing the varied models and frameworks which have as a consequence arisen from the desire to prove or disprove the validity or superiority of each. Behavioural economics as a field within the economics discipline has however suffered from being marginalised within what may be referred to as the traditional economic literature. In essence economics is focused on examining possible reasons for decision behaviour whether the outcomes can be measured in purely financial terms or not, as in the case espoused in economic literature as utility.

At the heart of this economic exploration into decision behaviour is the belief that decision makers are bound by the inherent need to abide by rational choice. The notion of decision makers being rational actors is at the very heart of the economic paradigm most apparent in the adopted / supported view that decision makers will seek to either maximise profits or minimise losses (Brown & Solomon, 1987). This neo-classical economic view of rational self-maximisation is otherwise referred to as "homo economicus" (Marsden, 1984). Economics is therefore more concerned with mapping the flow of inputs that underlie choices where the belief is that the decision process is linked to an immutable preference for rationality and the subsequent cognitive process is explained by a preference for maximization (or loss minimization) (Lee, 1971; McFadden, 1999).

The rational perspective has been criticised for failing to consider the cognitive limitations inherent in human nature (Simon,1979). Research has identified the existence of a number of circumstances which result in the violation of (?) profit maximization. The implications are that individuals give meaning to information and that their ability to make decisions is subsequently a function of both the capacity of the individual and the choices faced (Awashti & Pratt, 1990; Shapira, 1995). The most notable examples of violations to the rational decision making model are the sunk cost effect (Arkes & Blumer, 1985) also considered in terms of escalation to commitment (Staw, 1976; Whyte, 1991) and the Allais Paradox (Allais, 1953; Li, 1994).

Whilst the rational model has been unable to explain the violations, research employing approaches from psychology have been more promising. In contrast to the rational model, the psychology of decision making is more concerned with the nature of decision elements. Thus the decision process is viewed from the perspective that behaviour is local; adaptive; learned; dependent on context; motives; attitudes and affect (McFadden, 1999). Psychology has been defined as "...the study of behaviour and experience pursued by methods, the status of which is continually under review ..." (Ribeaux & Poppleton, 1978).

Research has identified that the rational decision model overlooks the influence of (?) an individual's personal biases and cognitive capacity for making decisions. The explanation for observed behavioural differences varies from the desire to avoid waste (Arkes & Blumer, 1985); the commitment to and need to justify prior decisions (Staw, 1981; Brockner, 1992); and the tendency to be risk-seeking as a result of previous losses (Whyte, 1986; Garland & Newport, 1991).

To better understand the nature of the violations to the rational decision making model it is proposed to develop a unified model of economic behaviour from the most promising of the theories which draw on the psychology of behaviour. …

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