What are the key psychological theories that influence decision-making?

What are the key psychological theories that influence decision-making?

There are several key psychological theories that influence decision-making, including the Rational Choice Theory, Prospect Theory, and the Bounded Rationality Theory. Would you like to explore any of these in detail?

Can you explain Prospect Theory?

Prospect Theory, developed by Daniel Kahneman and Amos Tversky, describes how people make decisions based on potential losses and gains. It suggests that people are more sensitive to losses than to gains, which can lead to risk-averse behavior when facing potential gains and risk-seeking behavior when facing potential losses.

How does Bounded Rationality differ from Rational Choice Theory?

Bounded Rationality acknowledges that individuals have cognitive limitations and cannot process all available information. In contrast, Rational Choice Theory assumes that individuals make decisions by fully evaluating all options to maximize utility. Bounded Rationality suggests that people often settle for a satisfactory solution rather than the optimal one.

What real-life examples illustrate these theories?

Real-life examples include financial decisions, where investors may hold onto losing stocks due to loss aversion (Prospect Theory), or consumers choosing a familiar brand over a new one due to cognitive overload (Bounded Rationality). Would you like more examples?