- Apply for Authority
- P-ISSN1738-3110
- E-ISSN2093-7717
- SCOPUS
ISSN : 1738-3110
A Critical Review on Behavioral Economics with a Focus on Prospect Theory and EBA Model
- Downloaded
- Viewed
Abstract
Purpose - For the past several decades, behavioral economics or behavioral decision theory has undergone rapid development. This study provides a critical review of the development of behavioral economics with a focus on what are deemed to be core theories in the field. Starting from the utility function proposed by Daniel Bernoulli in the 18th century, the development history of utility functions until the emergence of the prospect theory is thoroughly reviewed. Some of the experimental results violating the traditionally assumed utility function and supporting the prospect theory value function are summarized. The most representative principles of rational choice are transitivity, independence from irrelevant alternatives (IIA), and regularity. The development of behavioral economics has been triggered by finding counter-examples to these principles. Some of the choice behaviors discussed in this study as counter-examples to the traditional theories of rational choice are the St. Petersburg paradox; the Allais paradox; gambling behavior; and the various context effects including the similarity effect, attraction effect, and the compromise effect. The Elimination-by-Aspects (EBA) model, which was proposed as an explanation for the similarity effect, is discussed in detail as well. Based on the literature review and further analysis, this study summarizes the relationship between the context effects, prospect theory, and EBA model. Research design, data, and methodology - This study provides an extensive literature review on several important theories in the field of behavioral decision theory and adds some critical comments to the theories and the relationships among them. This study first reviews the development of utility functions. Daniel Bernoulli introduced the concept of utility function to solve the St. Petersburg paradox. In the mid-20th century, Herbert Simon proposed the "satisficing" heuristic and presented a value function with a shape different from traditional utility functions. This study highlights the strengths and weaknesses of several utility functions proposed until the emergence of the prospect theory value function. Results - This study posits that prospect theory and EBA model are the two most important theories in the field of behavioral decision theory. They can explain various choice behaviors that traditional utility maximization analysis has been unable to. The application of these models to various fields is further increasing nowadays. This study explains how prospect theory and the EBA model can be used to explain the context effects. Conclusions - The traditional economic theory relies on a single variable called "utility" in explaining consumer choice. However, this study argues that, in investigating consumer choice, several other variables should also be considered. These are the similarity among alternatives, an alternative's prototypicality within the category, the dominance relationship between alternatives, and the reference point in evaluating alternatives. Due to the development of behavioral economics, we are now closer to a more complete understanding of consumer choice behavior than in the past when we had only a single tool called utility.
- keywords
- Behavioral Economics, Prospect Theory, Elimination-By-Aspects Model, Context Effects
Reference
Allais, Maurice (1953), "Le Comportement de l'Homme Rationnel devant le Risque, Critique des Postulats et Axiomes de l'Ecole Americaine," Econometrica, 21, 503-546.
Anderson, Christopher J. (2003), "The Psychology of Doing Nothing: Forms of Decision Avoidance Result From Reason and Emotion," Psychological Bulletin, 129, 139-167.
Arrow K. J. (1951), "Alternative Approaches to the Theory of Choice in Risk-Taking Situations," Econometrika, 19(4), 404-437.
Barsalou, Lawrence W.(1985), "Ideals, Central Tendency, and Frequency of Instantiation as Determinants of Graded Structure,” Journal of Experimental Psychology: Learning, Memory, and Cognition, 11(Oct.), 629-654.
Batsell, R., and Polking, J. C. (1985), "A New Class of Market Share Models," Marketing Science, 4, 177-185.
Bernoulli, Daniel (1954), "Exposition of a New Theory on the Measurement of Risk," Econometrica, 22(1), 23-36.
Bernstein, Peter L.(2008), Against the God: The Remarkable Story of Risk, John Wiley & Sons, Inc..
Bettman, James R., Luce, Mary Frances and Payne, John W. (1998), "Constructive Consumer Choice Processes," Journal of Consumer Research, 25(3), 187-217.
Brenner, Lyle, Rottenstreich, Yuval, and Sood, Sanjay (1999), "Comparison, Grouping, and Preference,” Psychological Science, 10(May), 225-229.
Buchholz, Todd G.(1989), New Ideas from Dead Economists, New York: Penguin Books.
Busemeyer, Jerome R., Barken, R., Mehta, S. and Chaturvedi, A. (2007), "Context Effects and Models of Preferetial Choice: Implications for Consumer Behavior," Marketing Theory, 7(1), 39-58.
Carpenter, Gregory S. and Nakamoto, Kent (1989), “Consumer Preference Formation and Pioneering Advantage,” Journal of Marketing Research, 26(Aug.), 285-98.
Cascetta, Ennio and Papola, Andrea (2009), "Dominance among Alternatives in Random Utility Models," Transportation Research Part A, 43, 170-179.
Chernev, Alex (1997), "The Effect of Common Features on Brand Choice: Moderating Role of Attribute Importance," Journal of Consumer Research, 23(4), 304-311.
Cramer, H. (1930), "Under Mathematical Theory of Risk," Forsakringsaktiebolaget Skandias Festskrift, Stockholm: Centraltryckeriet, 7-84.
Debreu, G. (1960), “Review of R. D. Luce, Individual Choice Behavior: A Theoretical Analysis,” American Economic Review, 50, 186-188.
Dhar, Ravi (1997), “Consumer Preference for No Choice Option,” Journal of Consumer Research, 24(Sep.), 215-231.
Dhar, Ravi and Simonson, Itamar (2003), “The Effect of Forced Choice on Choice,” Journal of Marketing Research, 40(May), 146-160.
Friedman, M. and Savage, L. J. (1948), "The Utility Analysis of Choices Involving Risks," Journal of Political Economy, 56, 279-304.
Guadagni, P. M. and Little, John D. C. (1983), "A Logit Model of Brand Choice Calibrated on Scanner Data," Marketing Science, 2(Summer), 203-238.
Hahn, Minhi, Won, Eugene, Kang, Hyunmo and Hyun, Yong J. (2006), "Context Effects and Context Maps for Positioning," International Journal of Market Research, 48(2), 155-177.
Hardie, Bruce G., Johnson, Eric J. and Fader, Peter S. (1993), "Modeling Loss Aversion and Preference Dependence Effects on Brand Choice," Marketing Science, 12(4), 378-394.
Hayek, F. A. (1945), "The Use of Knowledge in Society," The Americal Economic Review, 35(Sep.), 519-530.
Helson, H. (1964), Adaptation-Level Theory. New York: Harper.
Hogarth, R. M. (1987), Judgement and Choice, 2nd ed., Chichester: Wiley.
Hsee, Christopher and Leclerc, France (1998), "Will Product Look More Attractive When Presented Separately or Together," Journal of Consumer Research, 25(Sep.), 175-186.
Huber, Joel, Payne, John W. and Puto, Christopher (1982), "Adding Asymmetrically Dominated Alternatives: Violations of Regularity and Similarity Hypothesis,” Journal of Consumer Research, 9(June), 90-98.
Huber, John and Puto, Christopher (1983), “Market Boundaries and Product Choice: Illustrating Attraction and Substitution Effects,” Journal of Consumer Research, 10 (June), 31-44.
Kahneman, Daniel and Miller, Dale T. (1986), “Norm Theory: Comparing Reality to Its Alternatives,” Psychological Review, 93(2), 136-153.
Kahneman, Daniel and Tversky, Amos (1979), “Prospect Theory: An Analysis of Decision Under Risk.” Econometrika, 47(2), 263-291.
Lichtenstein, Sarah and Slovic, Paul (1971), "Reversal of Preference Between Bids and Choices in Gambling Decisions," Journal of Experimental Psychology, 89, 46-55.
Luce, R. Duncan (1959), Individual Choice Behavior: A Theoretical Analysis. New York: John Wiley & Sons.
Luce, R. Duncan (1977), "The Choice Axiom after Twenty Years," Journal of Mathematical Psychology, 15, 215-233.
Luce, R. Duncan, and Raiffa, Howard (1975), Games and Decisions, New York: Wiley.
Luce, Mary Francis (1998), “Choosing to Avoid: Coping with Negatively Emotion-Laden Consumer Decisions,” Journal of Consumer Research, 24(March), 409-433.
Markowitz, H. (1952), "The Utility of Wealth," Journal of Political Economy, 60, 151-158.
Marschak, Jacob (1960), "Binary Choice Constraints on Random Utility Indicators," in K. J. Arrow, S. Karlin, and P. Suppes (Eds.), Mathematical Methods in the Social Sciences, 1959. Stanford: Stanford University Press, 312-329.
Marshall, Alfred (1920), Principles of Economics, 8th ed. London: MacMillan.
McFadden, Daniel (1973), "Conditional Logit Analysis of Qualitative Choice Behavior," in P. Zarembka, Frontiers in Econometrics Applications, Cambridge, Mass.: MIT Press.
Menger, K. (1934), "Das Unsicherheitsmoment in der Wertlehre," Weitschrift fur Nationalokonomie, 4(4), 459-485.
Mill, John Stuart (1848), Principles of Political Economy with Some of their Applications to Social Philosophy (1st ed.), London: John W. Parker.
Miller, A. George (1956), "The Magical Number Seven, Plus or Minus Two: Some Limits on our Capacity for Processing Information, Psychological Review, 63, 81-97.
Miller, Richard L. (1962), "Dr. Weber and the Consumer," Journal of Marketing, 26, 57-61.
Montgomery, Henry (1989), "From Cognition to Action: The Search for Dominance in Decision Making," in Process and Structure in Human Decision Making, ed., Montgomery, H. and Svenson,O., New York: Wiley.
Nedungadi, Prakash (1990), "Recall and Consumer Consideration Sets: Influencing Choice Without Altering Brand Evaluations," Journal of Consumer Research, 17(Dec.), 263-276.
Neumann, John von and Morgenstern, Oskar (1944), Theory of Games and Economic Behavior, (2nd). Princeton, New Jersey: Princeton University Press.
Ramsey, F. P. (1931), The Foundations of Mathematics, New York: Hartcourt, Brace, 156-198.
Restle, R. (1961), Psychology of Judgment and Choice, New York: Wiley.
Rieskamp, J., Busemeyer, J. R. & Mellers, B. A. (2006), "Extending the Bounds of Rationality: Evidence and Theories of Preferential Choice," Journal of Economic Literature, 44, 631-661.
Roe, R. M., Busemeyer, J. R. and Townsend, J. T. (2001), "Multialternative Decision Field Theory: A Dynamic Connectionist Model of Decision Making", Psychological Review, 108, 370-392.
Rooderkerk, R. O., Van Heerde, H. J. and Bijmolt, T. H. A. (2011), "Incorporating Context Effects into a Choice Model," Journal of Marketing Research, 48, 767-780.
Rosch, Eleanor and Mervis, Carolyn B. (1975), “Family Resemblances: Studies in the Internal Structure of Categories,” Cognitive Psychology, 7, 573-603.
Shafir, Eldar B., Simonson, Itamar and Tversky, Amos (1993), “Reason-Based Choice,” Cognition, 49(Oct.), 11-36.
Simon, Herbert (1955), "A Behavioral Model of Rational Choice," Quarterly Journal of Economics, 69 (1), 99-118.
Simonson, Itamar (1989), “Choice Based on Reasons: The Case of Attraction and Compromise Effects,” Journal of Consumer Research, 16(Dec.), 158-174.
Simonson, Itamar and Tversky, Amos (1992), “Choice in Context: Tradeoff Contrast and Extreme Aversion,” Journal of Marketing Research, 29(Aug.), 281-295.
Thaler, Richard H. (1980), "Toward a Positive Theory of Consumer Choice," Journal of Economic Behavior and Organization, 1, 39-60.
Thaler, Richard H. (1985), "Mental Accounting and Consumer Choice," Marketing Science, 4, 199-214.
Thaler, Richard H. (1999), “Mental Accounting Matters,” Journal of Behavioral Decision Making, 12(3), 183-206.
Thurstone, L. L. (1927), "A Law of Comparative Judgment," Psychological Review, 34, 273-286.
Tversky, Amos and Russo, J. (1969), "Substitutability and Similarity in Binary Choice," Journal of Mathematical Psychology, 6, 1-12.
Tversky, Amos (1972), “Elimination by Aspects: A Theory of Choice,” Psychological Review, 79(4), 281-299.
Tversky, Amos (1977), “Features of Similarity,” Psychological Review, 84(4), 327-352.
Tversky, Amos and Kahneman, Daniel (1974), "Judgment under Uncertainty: Heuristics and Biases," Science, 185, 1124-1131.
Tversky, Amos and Sattath, Shumel (1979), “Preference Trees,” Psychological Review, 86(6), 542-573.
Tversky, Amos and Shafir, Eldar (1992), “Choice under Conflict: The Dynamics of Deferred Decision,” Psychological Science, 6(Nov.), 358-361.
Tversky, Amos and Simonson, Itamar (1993), “Context-dependent Preferences,” Management Science, 39(10), 1179-1189.
Tversky, Amos and Kahneman, Daniel (1986), “Rational Choice and the Framing of Decisions,” Journal of Business, 59(4), 5251-5278.
Tversky, Amos and Kahneman, Daniel (1991), "Loss Aversion in Riskless Choice: A Reference Dependence Model", Quarterly Journal of Economics, 106(4), 1039-1061.
Usher, M. and McClelland, J. L. (2004), "Loss Aversion and Inhibition in Dynamical Models of Multialternative Choice," Psychological Review, 111, 757-769.
Wedell, D. H. and Pettibone, J. C. (1999), "Preference and Contextual Basis of Ideals in Judgment and Choice," Journal of Experimental Psychology, 128, 346-361
Won, Eugene J. S. (2007), “A Theoretical Investigation of the Effects of Similarity on Brand Choice Using the Elimination-by-Tree Model," Marketing Science, 26(6), 868-875.
Won, Eugene J. S. (2012), “A Theoretical Investigation on the Attraction Effect Using the Elimination-by-Aspects Model Incorporating Higher Preference for Shared Features," Journal of Mathematical Psychology, 56, 386-391.
Zajonc, R. B. (1968), “Attitudinal Effects of Mere Exposure,” Journal of Personality and Social Psychology, Monograph Supplement, 9, 1-27.
- Downloaded
- Viewed
- 0KCI Citations
- 0WOS Citations