Decision-Making Under Risk: A Normative and Behavioral Perspective

This chapter introduces the theories of decision-making under uncertainty and risk of socio-technical systems. Following the historic development of the main conceptions of rationality, we start with expected utility theories and explain the rational choice (or normative) perspective. We explain how decisions under risk can be optimized consistently within the framework of the theory, and under which conditions such analyses are particularly applicable and when they are reduced to an economic cost-benefit analysis. It is then discussed why the classic theories are sometimes misused and why the normative perspective is not suitable to describe or predict actual human behavior, perception or evaluation of decisions and their outcomes under uncertainty and risk. We then outline alternative theories of decision-making, including descriptive approaches from behavioral economics (e.g. cognitive biases) as well as ecological rationality and heuristic decision making. As is discussed in this article, the normative approach is suited for optimizing decisions in a consistent manner for relatively well defined (often technical) problems, whereas the alternative theories are more suitable to predict actual human and social evaluations and behavior and can provide improved decision making in complex situations where socio-technical system parameters as well as the decision maker’s preferences are not well defined.