Folk psychology provides the framework within which we think about decisions. According to this framework, decisions are intentions to act based on reasons. To act rationally, then, means to act with adequate reasons. Reasons fall into two categories--desires and beliefs. Normative models have substituted these folk categories with formal ones: preference/value/utility for desire, probability/expectation for belief.

2. Expected utility theory (EUT)

Expectation: Expectation refers to the belief how likely it is that an option has a particular feature or leads to a particular outcome. Expectation is typically measured in probabilities. The probability calculus puts many constraints on the decision maker that are not intuitively obvious--for example, the gambler's fallacy is the (false) belief that after streaks of events (say, 4 heads) the alternative becomes more and more likely (i.e., tail); this fallacy can be proven wrong by calculating conditional probabilities.

Value: Value refers to the strength of the desire for an option's feature or outcome. Measuring value is even more difficult than measuring expectation. Three common methods all have their problems:

1. Rating scales: Intuitively useful but they don't have an absolute scale and are therefore hard to compare from one person to the next or (within one person) from one instance to the next.

2. Pairwise comparisons: Easy judgments as long as there are fewer than 6 options to compare, but they are often intransitive (transitivity is one of the prerequisites for applying EUT).

3. Money: A common metric scale (i.e., with an absolute 0 and interval distances), but it is not stable across all contexts and all people. Below you see the law of "diminishing marginal utility" (= adaptation), which implies that the same increase of money can have different value (or utility) depending on personal wealth or immediate spending context.