Decisions, decisions

So, we started with Expected Monetary Value Theory (EMV), where we calculate the value of each possible outcome then, weight those by their probability of occurrence and choose the highest expected value (in brief). BUT...
The St Petersburgh Paradox (Bernoulli) argues that EMV doesn't account for the 'usefulness' or 'pleasure' that the reward of an action offers, that is, it assumes a linear value function for the reward. EMV focuses on money and is difficult to apply to other situations. Thus Utility Function proposed that a decision is based on the weight of utilities of outcomes by their probability of occurrence.  This became the normative model of rational choice where people maximise expected utility and, bonus, Expected Utility Theory (EUT) can be used for non monetary situations. EUT proponents say people are generally effective in pursuing their goals, upholding maximisation theory; that competition favours rational individuals and organisations ie survival of the (fittest) best decision maker; and, that the theory is built on solid theoretical foundations in the form of axioms (assumptions of behaviour). BUT...
Kahneman and Tversky (K&T) disagree, saying, "the logic of choice does not provide an adequate foundation for a descriptive theory of decision making" (1986, pp S252)They take issue with the axioms upon which EUT rests and highlight 4 main assumptions that are problematic to the theory:

1. Cancellation a key property of EUT says that decisions with the same utility value will cancel each other out. Not according to the Allais Paradox.
2. Transitivity also a basic assumption of EUT says that if a person refers A to B and B to C then it follows that he will prefer A to C...ermmmm...not all the time it would seem from some pretty clever research.
3. Invariance is essential to EUT and states that different representations of the same choice will yield the same outcome, ie decisions are made on facts not the presentation or 'framing' of those facts. Ya think? K&T don't think so either and illustrated it with nifty research.
4. Dominance a cornerstone of EUT, whereby if one option is better in one state and at least as good in another it is the dominant option and therefore will be the option of choice. Doesn't that depend on the circumstances which surely could be linked to invariance or lack thereof? Whadya know...K&T say that too.

Kahneman and Tversky propose that the violations of the axioms of Cancellation and Transitivity weaken the foundations of the normative model of decision making and, those of Invariance and Dominance bring it crashing down. Given time (and ability) to analyse a situation fully, invariance might well be preserved, however K&T postulate that people don't do the math or apply comprehension conversion to a scenario all the time. Likewise, invariance would stand true if 'prospects' of outcomes were linear, which EUT had already ascertained as not the case.  K&T propose that invariance violations can be explained by 'framing effects' which, bearing in mind non-linear values and beliefs, control the representation of options.
Prospect Theory (PT) is made up of 2 phases:
Phase 1:  preliminary analysis of the decision problem
The function of this editing stage is to organise and reformulate the options to simplify analysis and is comprised of: (i) coding of 'gains' or 'losses' V current asset position, (ii) the combination of probabilities with similar outcomes and, (iii) the segregation of 'risky' V 'riskless' components of a problem. Having applied these operations to each prospect, cancellation is applied by discarding common components and constituents of prospects. Prospects are also simplified by rounding and/or discarding extremely unlikely outcomes and dominated prospects are rejected. Editing may be directed by how the acts, contingencies and outcomes are framed under the influence of the presentation of the problem, norms, habits and expectations of the decision maker.
Phase 2 : framed prospects are evaluated and the prospect of highest value is selected, either by detecting the dominant prospect or by comparison of their values.
Using some very impressive looking mathematical formulae, that get me very flustered, K&T conclude that the value function is defined by gains and losses, exhibiting an 'S' shape when graphically represented. Where gains are generally concave and losses convex with a steeper incline. The steepness difference illustrates a more extreme reaction to losses  than to gains (loss aversion)
K&T (1986) suggest that the "axioms of rational choice are generally satisfied in transparent situations and often violated in non-transparent ones." (p S272). Prospect Theory is a descriptive theory which introduces psychological considerations to decision making which seems a fairly obvious decision bearing in mind that the decision makers are people not computers. BUT...
We also know that people as a whole have a tendency to idleness when it comes to using cognitive processes. Heuristics have been identified as being a well used alternative to other cognitive strategies, so why not decision making? After all many decisions we make are in instances where we have limited time and resources to do it properly. Well, Brandstatter and colleagues looked at just that, comparing the Priority Heuristic (PH) with (among others) Utility Theory and Prospect Theory as well as other heuristic models. Without going into detail (I've gone on enough already) they conclude that the PH can account for many of the inconsistencies that other models generate and was more successful in predicting peoples preferences.  They propose that this fast and frugal model, based on Take the Best, may be applied to other cognitive processes where choices are assumed to involve 'trade offs'.