From Subjective Expected Utility Theory to Bounded Rationality: An Experimental Investigation on Categorization Processes in Integrative Negotiation, in Committees' Decision Making and in Decisions under Risk

Abstract

As mentioned in the introduction, the objective of this work has been to get a more realistic understanding of economic decision making processes by adopting an interdisciplinary approach which takes into consideration at the same time economic and psychological issues. The research in particular has been focused on the psychological concept of categorization, which in the standard economic theory has received until now no attention, and on its implications for decision making. The three experimental studies conducted in this work provide empirical evidence that individuals don not behave according to the perfect rationality and maximization assumptions which underly the SEUT, but rather as bounded rational satisfiers who try to simplify the decision problems they face through the process of categorization. The results of the first experimental study, on bilateral integrative negotiation, show that most of the people categorize a continuum of outcomes in two categories (satisfying/not satisfying), and treat all the options within each category as equivalent. This process of categorization leads the negotiators to make suboptimal agreements and to what I call the ?Zone of Agreement Bias? (ZAB). The experimental study on committees? decision making with logrolling provides evidence of how the categorization of outcomes in satisfying/not satisfying can affect the process of coalition formation in multi-issue decisions. In the first experiment, involving 3-issues and 3-parties decisions under majority rule, the categorization of outcomes leads most of the individuals to form suboptimal coalitions and make Pareto-dominated agreements. The second experiment, aimed at comparing the suboptimizing effect of categorization under majority and unanimity rule, shows that the unanimity rule can lead to a much higher rate of optimal agreements than the majority rule. The third experiment, involving 4-issues and 4-parties decisions provides evidence that the results of experiments 1 and 2 hold even when the level of complexity of the decision problem increases.