Developing Prospect Theory with Multiple Reference Points in Decision Making

Abstract

Objective: Multi-attribute utility theory is one of the approaches in multi-attribute decision-making. It is developed based on the logic of the expected utility theory. The main difference between the methods derived from the expected utility theory and multi-attribute decision-making methods is defining the role of the value function. The prospect theory was emerged to criticize the expected utility theory. An issue open to controversy in the field of decision-making is how to apply the prospect theory in developing multi-attribute decision-making methods. Some research has attempted to address the issue in recent years, yet there are shortcomings in applying this theory in multi-attribute decision-making methods, including determining the reference point. The prospect theory calculations permit any reference point to be involved but do not allow multiple reference points to be considered simultaneously. In this area, theories capable of providing interaction of several references points simultaneously are needed. Methods: In this paper, three reference points were used and considered simultaneously to develop a multi-attribute utility theory model. Results: The developed model was presented in the form of definitions and mathematical relations and its applicability was shown using an example and based upon the data related to the selection of aircraft suppliers. Conclusion: The proposed model is able to solve the problem of not paying attention to multiple reference points simultaneously and can cover the research gap in the field of decision-making literature.

Keywords

• multi-attribute decision making (madm)
• prospect theory
• multi-attribute utility theory
• value function