Decision Making Under Risk - Application to Conditions of the Czech Republic

conference paper

English

Classical and neoclassical economic theories consider a human as a rational individual making logical decisions and maximizing his profit. But what if it is not the case? People making decisions in the real world will never be perfectly informed about product or service they want to purchase. Human beings are irrational in the real world. They are influenced by their emotions, feelings, method of presentation of particular information. I.e., variety of factors, influencing the individual, should be taken into account. Definitely, not a single one results in the maximization of profit on the basis of rational decision. On the contrary, people are trying to eliminate the risk, which they face. The economic theories propose that people make their decisions rationally, practically avoiding the risk. Nevertheless, where could be then ranked gamblers, bookmakers and similar people? They are not just a negligible statistical deviation. On the contrary, there are many of them among us. Already in the 18th century the first reference to the close connection of economics and psychology was framed. The author of this idea was Adam Smith himself. In modern history there are people who believe that psychology should be the integral part of economics. They are behavioural economists. Behavioural economics was born in the 1970s as an alternative economic trend; nowadays, it is becoming a part of the mainstream economics. Behavioural economics is interested in the decisions of real people, while coming out both from economics and psychology. In 1952 Maurice Allais carried out an experiment during the economics conference held in Paris proving that people do not make decisions to maximize their profit, but to minimize risk. Mentioned experiment was coined as Allais paradox. Allais is Nobel prize laureate in the economic sciences; however, not for this paradox. Daniel Kahneman with his colleague Amos Tversky published (in 1979) the article 'Prospect Theory: An Analysis Decision Under Risk'. It was a breakthrough article describing the behaviour of people under uncertainty and risk. The authors state that the method in which the individual alternatives are formulated ('framed') will influence the decision, which the particular person will reach. In this article the authors laid the foundations for the behavioural economics. The effect of framing (method of formulation of the individual alternatives) was described in more detail in two articles, i.e. 'The Framing of Decision and the Psychology of Choice' and 'Rational Choice and the Framing of Decisions'. In mentioned articles the authors investigated the sensitivity of consumers to the individual information and method of their presentation. Daniel Kahneman is Nobel prize laureate in the economic sciences for his work on the human judgment and decision under uncertainty. The article is involved in the similar issue as the authors Kahneman and Tversky in their article 'Rational Choice and the Framing of Decision'. The objective of the article is to apply the research, conducted by the authors, to the conditions of the Czech Republic, thus finding whether the effect of framing can be applied also to the conditions of a Czech consumer. The research was carried-out by means of the questionnaire investigation. Totally 114 respondents were addressed, and dependency of responses to the individual factors (sex, age, highest completed education, economic activity, field of study resp. employment, place of residence and size of municipality in which the particular respondent lives) was monitored.

Prospect theory; framing effect; decision-making; risk; behavioural economics

FOJTŮ, K.; ŠKAPA, S.

2012

20. 9. 2012

978-80-214-4581-9

Trends in economics and management for the 21st century

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