Decision making is the cognitive process of choosing between alternative possible actions. The normative approach to decision making attempts to establish ideal ways of deciding what will give the best decision possible. Descriptive approaches aim to describe how decisions are actually taken as against how they should be made. A risk in decision making is the possibility of a negative outcome. A riskless decision involves choices where the outcomes of the choices are known with certainty. Single attribute decision problems involve alternatives that vary in only one dimension. The multi-attribute decision problem is a decision task in which the alternatives vary in many dimensions or aspects. The expected value is the long-term average value of a repeated decision, which is determined by probability and the size of the outcome.

The expected value theory works like a charm for decisions that involve money, but it does not comply with human behaviour. Human behaviour seems to follow risk aversion. This is avoiding risky choices even when a higher expected value than riskless alternatives. Risk seeking is a preference for risky choices even when riskless alternatives of a higher value are available. Risk aversion is mostly used when choices are phrased positively. Risk seeking is mostly used when choices are phrased negatively. Utility is the subjective value of an option. Subjective probability is how likely a person believes an outcome to be irrespective of the objective probability.

The prospect theory is a decision theory stressing relative gains and losses (e.g: 10$ means more to a poor person than to an extremely rich person). This theory uses loss aversion. This is that there is a greater dislike of losing utility than liking for gaining the same degree of utility (e.g: losing $10 would feel worse than winning $10 would feel good). Loss aversion is shown in the endowment effect, the tendency to over-value a possessed object and to require more money to sell it than to buy it in the first place (e.g: people don’t want to sell something precious to them for the price which they bought it for). The status quo bias is a tendency to prefer the current state of affairs and this also shows loss aversion.
Objective probabilities are transformed into subjective probabilities, also called decision weights. People tend to overweight small probabilities (e.g: the chance of dying because of a shark attack) and underweight big probabilities (e.g: the chance of dying because of heart disease). Framing effects in decision making occur when irrelevant features of a situation affect the decisions that are made (e.g: something being described positively or negatively). Invariance is the principle that choices should not be affected by how the options are described.

There are two major probabilities often used in making probability judgements:

1. Availability heuristic
   Things that come to mind more quickly are thought to occur more often.
2. Representativeness heuristic
   Representative or typical instances tend to be judged more likely to occur than unrepresentative instances.

The conjunction fallacy is the mistaken belief that the conjunction of two events is more likely than either one of A and B. The extension rule states that if the extension of a set, A, includes the extension of a set, B, then the probability of A must be greater than or equal to the probability of B. Frequencies can correct thinking in conjunction tasks. The base rate of an event is the overall probability of the event in a population.

An affect heuristic involves substituting feelings for target attributes in decision problems. People tend to form emotional responses to the initial component to which they were exposed. People with damage to the ventromedial frontal cortices of the brain don’t have emotional responses to risky decision options which warn them of danger.

The multi-attribute theory (MAUT) states that when considering two options an expected value (but then with weights instead of money) table should be made. There are, however, also other options. MAUT requires a lot of cognitive effort. When someone uses elimination by aspects, one aspect is chosen and all options that did not meet some criterion level are eliminated (e.g: all holidays above a certain price). This is a cognitively less demanding procedure than MAUT. Satisficing is a technique where the first option that meets the set criteria is chosen. The MAUT approach is a compensatory technique (e.g: a good rating on one thing can compensate a bad rating on another) and the other approaches are not compensatory. When choices are difficult, people tend to use a more demanding approach to the decision.

The two-system approach to thinking states that there are two modes of thought. System 1 is a hypothetical system that carries out rapid intuitive thinking. System 2 is a hypothetical system that carries out deliberate thinking. System two will be more involved in careful analytical decision making that seeks to combine many types of information in a rule-governed procedure. System 1 will be more involved in decision making based on heuristics and biases.

Fast and frugal heuristics are heuristics that are fast and easy to execute as they require little effort. The recognition heuristic is a heuristic where the choice is based on something you recognize. Too much knowledge of a domain can make a heuristic unworkable.

Consequentialism states that choices are being made based on the possible consequences of an action. There are heuristics that oppose the consequentialism, such as ‘do not harm’ or ‘fairness’. In terms of consequences, omission and commission can have the same results, yet people tend to go for the omission, because it is easier to do nothing than to do something. Doing nothing makes sure that people don’t feel responsible for their actions. This is called the omission bias. Most people also see punishment as a mean for retribution, not thinking of the consequences. Sometimes consequentialism is breached because of the fairness heuristic, simply because something is not fair.

Naturalistic decision making refers to making real-life decisions in the field (e.g: in case of an emergency). Critical incident analysis is gaining information about naturalistic decision making by analysing detailed recalls of recent important decisions. Recognition primed decision was most common in naturalistic decision making. This is expert knowledge-based decision making in which cues in the situation are recognized as indicating particular actions (e.g: a firemen sees a cue for an explosion and immediately flees). Real-life decision making by experts do not actually involve conscious decision making between alternatives and is more of a ‘one-option’ decision making.

Neuroeconomics is the study of neural processes underlying economic decisions. Animal study shows that decisions that activate the reward system more are preferred over decisions that activate the reward system weakly. Activity in dopamine neurons is linked to reward size. Choices of delayed rewards are governed by the lateral prefrontal cortex. Short-term decisions are driven by the limbic system.

Old people make poorer financial choices than middle-aged people, although old people have more experience, because of the decline of cognitive functioning. This can be related to the decline of fluid intelligence over the years. Old people are generally also more positive and this also changes the decisions they make. Young people felt worse after anticipating a loss and showed more activity in the insula than older people.

When making decisions under uncertainty, people tend to be influenced more by perceived risk than by objective risk. Consumers may benefit from greater awareness of how even important choices about taking out loans may be swayed by presentational factors which are irrelevant to making good decisions.