Decision making is the process of choosing among alternatives based on their expected outcomes and the decision maker's preferences. Cognitive psychology has revealed systematic departures from the rational ideal described by expected utility theory: people use heuristics that are fast and usually effective but can lead to predictable biases. The study of judgment and decision making, pioneered by Daniel Kahneman and Amos Tversky, has transformed psychology, economics, medicine, law, and public policy.
Normative vs. Descriptive Theories
Expected utility theory prescribes how a perfectly rational agent should decide: maximize the expected utility (probability-weighted value) of outcomes. Prospect theory (Kahneman and Tversky, 1979) describes how people actually decide: they evaluate outcomes relative to a reference point, are loss averse (losses loom larger than equivalent gains), and weight probabilities nonlinearly (overweighting rare events, underweighting moderate-probability events).
Heuristics and Biases
Kahneman and Tversky identified numerous heuristics — cognitive shortcuts — that simplify complex judgments but can produce systematic errors. The availability heuristic judges frequency or probability by ease of recall. The representativeness heuristic judges category membership by similarity to a prototype. Anchoring biases estimates toward an initial reference point. These heuristics are not irrational per se — they are efficient strategies that work well in many environments — but they can be exploited or can lead to poor decisions in unfamiliar contexts.
Thaler and Sunstein's nudge framework applies decision-making research to policy design. By understanding how heuristics and biases influence choices, choice architects can structure decision environments to promote better outcomes while preserving freedom of choice. Default effects (most people stick with the default option), framing effects, and simplification of complex choices are tools of choice architecture now widely applied in health, retirement savings, and environmental policy.