An application of prospect theory to a SHM-based decision problem

Abstract

Decision making investigates choices that have uncertain consequences and that cannot be completely predicted. Rational behavior may be described by the so-called expected utility theory (EUT), whose aim is to help choosing among several solutions to maximize the expectation of the consequences. However, Kahneman and Tversky developed an alternative model, called prospect theory (PT), showing that the basic axioms of EUT are violated in several instances. In respect of EUT, PT takes into account irrational behaviors and heuristic biases. It suggests an alternative approach, in which probabilities are replaced by decision weights, which are strictly related to the decision maker’s preferences and may change for different individuals. In particular, people underestimate the utility of uncertain scenarios compared to outcomes obtained with certainty, and show inconsistent preferences when the same choice is presented in different forms. The goal of this paper is precisely to analyze a real case study involving a decision problem regarding the Streicker Bridge, a pedestrian bridge on Princeton University campus. By modelling the manager of the bridge with the EUT first, and with PT later, we want to verify the differences between the two approaches and to investigate how the two models are sensitive to unpacking probabilities, which represent a common cognitive bias in irrational behaviors.