Rational Decision Making

The question of how we should make rational decisions has a long history. Two of the first thinkers to address it were eminent mathematicians Blaise Pascal (1660) and Daniel Bernoulli (1738), and they began work on a set of ideas which eventually became known as Expected Utility Theory (EUT).

EUT provides an account of how we should make decisions rationally, is one of the key theories in economics, and is taught to countless management students each year. According to this rational model, when deciding what to do we should take each option available to us, attach a utility (or value) to all of the outcomes of the option, weight these values by their associated probabilities, and add up the result.

The option with the highest summed value is the one we should choose. The appealing thing about EUT is that it uses simple mathematical principles to ensure that information about options, payoffs, and probabilities are weighed up fully and in a logically defensible manner. The trouble is that over the last 35 years both psychologists and rebel economists have argued convincingly that whilst EUT provides an entirely satisfactory way of describing what we should do, it is an unsatisfactory account or what we actually do.

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