Theoretical approaches to decision making assume rationality. However, early assumptions about how humans would make decisions, particularly with regard to finances, failed to account for how we as humans make choices in the face of uncertainty. The reality is that human beings actually make decisions by considering the probabilities of gains and losses associated with competing alternatives, rather than solely considering the end-state.

Behavioral economists were among the first to consider human irrationality in decision making. Research showed that in scenarios where people could choose certain loss of a small amount vs. possible loss of a great amount, people consistently chose the latter, because it had the benefit of uncertainty. The same model framed as gains led to the opposite result. As such, researchers concluded that utility in decision outcomes is a perception held by individuals, rather than an objective state.


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