Chapter preview

All decisions involve risk at some level – minimally they involve the risk that they will be the wrong decision to have made. Consequently, it is necessary to be selective about the work on decision-making that is reported here. This chapter focuses upon three domains of research relevant to decision-making and risk. It looks at heuristics, biases and risk framing; including optimistic bias and hindsight bias and confirmatory bias. Prospect Theory and Cumulative Prospect Theory are described. It describes the role of ‘naive theories’, schemas and mental models of risk in decision-making. It summarises some of the literature on risk in group decision-making, focusing upon group dynamics that influence individual risk estimates. The concept of ‘nudge’ is described. Against the backdrop of the 2008 financial crisis, the chapter concludes with a call for research on the way individuals make important financial decisions in their everyday lives. The significance of the theoretical models that are summarised here for those important real-world risk decisions needs to be explored.

Decisions in uncertainty

There has been considerable research that has examined how people make decisions under conditions of uncertainty (Lehrer, 2009). Some of this work explores how people make decisions when they have incomplete or contradictory information. For instance, how will I decide where to go to meet a friend in a large train station when I do not know where exactly in the station she will be? Alternatively, how do I decide what to do if I have two sets of instructions and one says my friend will be at one train station, the other says she will be at a different station? Such studies are not examining decisions about what would commonly be called hazards. Yet they are investigating decisions where risk is involved. Failing to find my friend is the risk I run in the example given. Other work focuses specifically on how people make decisions about established hazards or known risks. For example, there is a volume of research on how gamblers determine on what, when and how much to bet. Similarly there are studies of how communities decide how to respond to the prospect of having a dangerous industrial facility sited in their midst. Such studies are clearly concerned with how decisions about a hazard are taken.