Question

Normative theories of decision-making suggest that people, as rational beings, ought to choose the best possible outcome under ideal conditions in a manner following calculated logic. Elaborate one case in which this type of theory does not hold up.

Answer 1

Normative theories of decision-making fail to capture instances of irrational behavior evidenced in real life, where psychological and emotional factors lead to decisions that deviate from rational economic models, such as decisions influenced by brand loyalty despite cheaper alternatives.

Step-by-step explanation:

Normative theories of decision-making, which suggest that people should act entirely rationally and select the optimal outcome, do not always hold up in real-world situations. One example where such theories fall short is when considering behavioral economics, which takes into account the psychological, cognitive, emotional, cultural, and social factors that affect economic decisions. People often exhibit irrational behavior by not taking all available information into account, making inconsistent choices, or by valuing losses more heavily than gains - a principle known as loss aversion.

For instance, an individual may choose to buy a more expensive product due to brand loyalty, even if a cheaper alternative offers the same features and quality. This decision contradicts the normative theory but is understandable within the context of the emotional value they put on the brand.