The decision-making process of individuals in a competitive environment under risk and uncertainty - Курсовая работа

Introduction In modern world with its free markets and globalization, competition becomes more and more common environment. The world population continues to grow, and toughness of competition increases. Rating systems develop in different areas such as education, and best specialists such as salesmen in business receive bonuses etc. Some companies implement competition features, which are thought to increase the productivity of workers .Competition is also a key element in such areas as sports and politics. However, outcomes in spreading competition do not fully depend on actions of people only. Some random factors may influence the results no matter how much effort has been put into performed actions. In this case attitude of people towards risk influences their actions and the result of the whole competition. Therefore, it becomes important how risk attitudes may change in the competitive environment. In this research we analyze behavior of individuals in the competitive environment under risk and uncertainty. We apply prospect theory (D. Kahneman, A. Tversky, 1979) to this setting, which “has become one of the most influential behavioral theories of choice in the wider social sciences, particularly in psychology and economics” [14]. We construct a model based on prospect theory application to the competitive environment, when wealth is not directly involved in the competition itself. In this case applicability of prospect theory and presence of its effects requires experimental verification. We conduct an experiment for decision-making process under risk and uncertainty in the competitive environment. Then we analyze results of the experiment and test the compliance between these results and theoretical model based on the prospect theory. As a result, we can evaluate the applicability of prospect theory to the competition and realization of such effects as reference dependence and reflection effect in the considered setting. Goals and objectives of the research Goal of the research: to evaluate the decision-making process of individuals in a competitive environment under risk and uncertainty by applying prospect theory in the research model and conducting an experiment. Objectives: Consider theoretical aspects of the decision-making process of individuals under risk and uncertainty. Apply prospect theory to the competitive environment with uncertainty elements and construct a relevant model. Develop and conduct an experiment to test an application and effects of prospect theory to the competitive environment with uncertainty elements. Analyze the results, which reflect behavior of individuals in the decision-making process of individuals in a competitive environment under risk and uncertainty. Section 1. Literature review 1.1 Choice under uncertainty Decision-making process is a process of rational or irrational choice between alternatives, aimed at achieving some result. Outcomes are often uncertain, and people face the risk in the process of decision-making. Such process becomes more difficult under risk and uncertainty, and many researches study this case. The expected utility hypothesis takes a central place in studies of decision theory and is based on the assumption of the rationality of economic agents. In general, the purpose of the agent is to maximize expected utility: Σ (pi u(xi)), where xi - value of the outcome, pi - probability of its implementation, and u(xi) is a utility function dependent on the outcome. This theory was developed as an answer to so-called St. Petersburg paradox. This paradox is a setting, when agents must be ready to pay an infinite amount of money for a certain lottery, if they base a decision on expected value. In reality, it is not true, and expected utility concept can explain why. However, there are situations where an individuals behavior is not consistent with the hypothesis of expected utility too. In the traditional economics, one crucial property of economic agents is assumed. People are rational; they analyze and take into account all available information when making decisions. However, behavioral economics based on the evidence from real world proves that people are irrational; their choice is largely intuitive, and there are cognitive heuristics; people are sensitive to many parameters in decision-making; risk is taken or avoided depending on the context. Various theories arise in order to describe real behavior of economic agents and deal with phenomena, which are hardly explained by existing decision-making theories. Much credit for the development of alternative economic concepts of decision-making belongs to Daniel Kahneman, who has received the Nobel Prize in Economics in 2002 “for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty”. In 1979 Daniel Kahneman and Amos Tversky proposed a so-called “prospect theory” [5]. This theory is based on the real b