ABSTRACT
When attempting to explain decision-making, economists seldom distinguish risk (where probabilities of the potential outcomes of a decision are known) from uncertainty (where these probabilities are unknown). In most cases, decision-making under risk receives more attention than decision-making under uncertainty. This is partly because economists treat risk and uncertainty as interchangeable and partly because risk lends itself to calculations of expected utility and hence is compatible with widely recognised economic models that are based on a narrow understanding of rationality.
The hesitation to distinguish risk from uncertainty is problematic because for most decisions in everyday life, decision-makers do not know the probabilities, nor do they actively try to ascertain them. Instead, they often rely on individual heuristics or social frames and turn towards others to reduce the uncertainty they encounter. When economists do not take this into account, the resulting models of decision-making under risk and uncertainty can be at least incomplete and possibly even false.
This chapter summarises three prominent economic approaches to explaining decision-making. To counter their blind spots regarding uncertainty and the social context of decision-making, the social updating model is developed. Its development is guided by the conviction that revealing a phenomenon’s underlying mechanisms increases a model’s explanatory value. The social updating model forms a paradigm case of social neuroeconomics as defined in the introduction of this book. It synthesises models and insights from economics, psychology and social neuroscience, such as Haidt’s social intuitionist model (2001) and Loewenstein et al.’s risk-as-feelings perspective (2001). Furthermore, it analyses and highlights the affective and social aspects of decision-making. This will result in the claim that the proper way of explaining decision-making is not to conceptualise it as Bayesian updating but rather as social updating.
