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Behavioral decision theory originated as a critique of classical rational choice models, with Expected Utility Theory serving as the initial normative benchmark. Developed by John von Neumann and Oskar Morgenstern, this axiomatic framework assumed that individuals maximize expected utility based on consistent preferences, dominating mid-20th-century thought in economics and psychology. It provided a standard for rational decision-making under risk, against which behavioral deviations would later be measured.
The first paradigm shift came with Herbert Simon's Bounded Rationality, which challenged the ideal of full rationality by emphasizing cognitive limits and informational constraints. Simon introduced satisficing—seeking satisfactory rather than optimal outcomes—and redirected focus toward the actual processes of human judgment. This school laid the foundational critique for behavioral approaches, prioritizing descriptive realism over normative optimization.
In the 1970s, Daniel Kahneman and Amos Tversky established the Heuristics and Biases program, a methodological school that systematically documented cognitive shortcuts and systematic errors in judgment under uncertainty. Through experimental psychology, they identified biases like anchoring, availability, and representativeness, demonstrating pervasive departures from normative standards. This program cemented a research tradition centered on descriptive accuracy and experimental evidence.
Kahneman and Tversky further advanced the field with Prospect Theory, a descriptive model for decisions under risk that became a canonical behavioral paradigm. Prospect Theory introduced reference-dependent value functions, loss aversion, and nonlinear probability weighting, explaining phenomena such as the endowment effect and asymmetric risk attitudes. Its extension, Cumulative Prospect Theory, refined these insights with rank-dependent utility, solidifying its role as a core theoretical framework.
Contemporary behavioral decision theory integrates these schools with models addressing ambiguity aversion, intertemporal choice, and social preferences. Frameworks like the Multiple Selves Model for hyperbolic discounting and theories derived from the Ellsberg paradox on ambiguity have expanded the paradigm's scope. Today, the field continues to evolve, blending psychology and economics to refine descriptive models of human decision-making while maintaining rivalry with normative benchmarks.