ABSTRACT. Alternative descriptions of a decision problem often give rise to different preferences, contrary to the principle of invariance that underlies the rational theory of choice. Violations of this theory are traced to the rules that govern the framing of decision and to the psychophysical principles of evaluation embodied in prospect theory. Invariance and dominance are obeyed when their application is transparent and often violated in other situations. Because these rules are normatively essential but descriptively invalid, no theory of choice can be both normatively adequate and descriptively accurate.
The modern theory of decision making under risk emerged from a logical analysis of games of chance rather than from a psychological analysis of risk and value. The theory was conceived as a normative model of an idealized decision maker, not as a description of the behavior of real people. In Schumpeter's words, it “has a much better claim to being called a logic of choice than a psychology of value” (1954, p. 1058).
The use of a normative analysis to predict and explain actual behavior is defended by several arguments. First, people are generally thought to be effective in pursuing their goals, particularly when they have incentives and opportunities to learn from experience. It seems reasonable, then, to describe choice as a maximization process. Second, competition favors rational individuals and organizations. Optimal decisions increase the chances of survival in a competitive environment, and a minority of rational individuals can sometimes impose rationality on the whole market.
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