Plausibility Theory


Definition: Plausibility Theory is a decision making concept that replaces the expected values calculation of Bayesian Theory with a risk threshold that is more resembling the way decision makers actually (should) make decisions.
As in Bayesian Statistics, PT also examines the range of possible outcomes but focuses on the probability of hitting a threshold point - such as a net loss - relative to an acceptable risk.
For example: a normally profitable decision is rejected if there is a higher than 2% risk of a loss leading to bankruptcy.
Plausibility can explain the tendencies of managers to avoid unacceptable downside risks, and to avoid taking risks that can't be known.
See also Black Swan Theory.


More on individual decision making: Anchoring Bias, Bayesian Theory, Black Swan Theory, Bounded Rationality, Cognitive Bias, more...


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