New decision theory could revolutionize how we make complex choices!
Complex decision problems involving sequences of choices and random events are often analyzed using decision trees to maximize expected monetary value. However, this traditional approach may not reflect how people actually make decisions. A new method called cumulative prospect theory suggests using subjective valuations based on relative outcomes and probabilities instead. By introducing the concept of a certainty equivalent, it becomes possible to compare risky and non-risky options in complex decision scenarios.