A reference-dependent regret model for deterministic tradeoff studies

Abstract

Today's typical multi-criteria decision analysis is based on classical expected utility theory that assumes a mythical "Rational Individual" immune to psychological influences such as anticipated regret. It is therefore in conflict with rational individuals who trade-off some benefits and forgo the alternative with the highest total classical utility for a more balanced alternative in order to reduce their levels of anticipated regret. This paper focuses on decision making under certainty. It presents a reference-dependent regret model (RDRM) in which the level of regret that an individual experiences depends on the absolute values rather than the differences of the utilities of the chosen and forgone alternatives. The RDRM best choice may differ from the conventional linear additive utility model, the analytic hierarchy process, and the regret theory of Bell and Loomes and Sugden. Examples are presented that indicate that RDRM is the better predictive descriptor for decision making under certainty. RDRM satisfies transitivity of the alternatives under pairwise comparisons and models rank reversal consistent with observed reasonable choices under dynamic or distinct situations. Like regret theory, the RDRM utilities of all the alternatives under consideration are interrelated. For complex trade-off studies regret is incorporated as an element of a cost-utility-regret analysis that characterizes each alternative in terms of its monetary cost, an aggregate performance utility, and a regret value. This provides decision makers adequate information to compare the alternatives and depending on their values they may trade-off some performance and/or cost to avoid high levels of regret. The result is a well-balanced alternative often preferred by reasonable decision makers to the optimal choice of classical multi-attribute utility analysis. The model can readily be extended to incorporate rejoicing to suit decision makers who seek it. The approach is illustrated using a hypothetical but realistic aircraft selection problem.

Integrated Transport Planning Framework Involving Combined Utility Regret Approach

“…Moreover, the least-regret as a compromise solution is associated with higher user benefits in the short-term and lower user benefits in the long-term, likely leading to the higher political acceptability of this scenario in the short-term. Thus, considering a generalized utility combining both utility and regret in the evaluation process could be informative to decision-makers by considering the impact of different MCA models under uncertainty (16). Consequently, the proposed assessment of policy-packages are more robust and transparent compared to the existing approaches solely based on utility-maximization.…”

“…The utility-based MCA is based on the method of multi-attribute utility analysis (MAUA), a structured methodology designed to handle trade-offs among multiple objectives in a rank ordered evaluation of alternatives that reflects the decision-makers' preferences (e.g., 6,10,16,23,24). The basic assumptions of MAUA are that each alternative is characterized by a multi-attribute utility function, the alternative utilities are independent, and the attributes characterizing each alternative are independent (16).…”

Further explanations for context effects: a perspective of ideal and reference points

“…Before developing the proposed regret and rejoicing functions, we should highlight that there is no fundamental law of nature to postulate regret or rejoicing to be concave or convex (Kujawski 2005). Therefore, as Loomes and Sugden (1982) suggested that the regret and rejoicing functions can be made mainly on the basis of empirical evidence.…”

Communication on the paper ‘‘A reference‐dependent regret model for deterministic tradeoff studies’’

“…Recently, Kujawski [2005] argued that a person's level of regret often depends explicitly on the absolute values of the utilities of the chosen and forgone alternatives rather than simply the differences. He proposed the Reference-Dependent Regret Model (RDRM) to account for this behavior.…”

“…Furthermore, in Kujawski [2005], three properties were introduced which were argued to be necessary conditions that any effective MCDA model should satisfy. The first property is termed the "independence of dominated alternatives."…”