Psychological Narratives in Decision Theory: What They Are and What They Are Good For

Decision theory is a branch of economics concerned with how individuals make choices under conditions of uncertainty. The mathematical models developed in this field are generally accompanied by ‘psychological narratives,’ i.e. accounts of the psychological factors and processes that determine an individual’s choices under uncertainty. This paper makes three contributions. First, it reviews the psychological narratives associated with nine influential models developed since the late 1970s to supersede expected utility theory. Second, it examines the epistemological status of these narratives, arguing that they draw from folk psychology and are best understood as as-if constructs. Third, it explores two main epistemic functions of psychological narratives: they serve as rhetorical devices that enhance a model’s perceived validity; more importantly, and despite their fictional nature, they provide explanations for choice-behavior phenomena. Recognizing this latter function requires abandoning the assumption that truth is a necessary condition for explanation.