Judgement & Choice Making

Question 1

Judgement

Answer 1

An assessment of the likelihood of a certain event based on incomplete information

Question 2

Decision-making

Answer 2

The act of selecting one option from several possibilities

Question 3

Bayesian inference

Answer 3

The formula: where one makes statistical inferences where original estimates are modified by new evidence or experience to create later estimates

Question 4

Bounded rationality

Answer 4

We are rational, but within limits.

Question 5

Satisficing

Answer 5

When one considers options one by one and then chooses one that meets their minimum level of acceptability

Question 6

Heuristics

Answer 6

Strategies that ignore some of the information with the aim of being able to make faster decisions than more complex methods

Question 7

What are the 5 types of heuristics?

Answer 7

1.Representativeness heuristic
2. Availability heuristic
3. Affect heuristic
4. Recognition heuristic
5. Anchoring-and-adjustment heuristics

Question 8

Representative heuristic

Answer 8

We judge the probability of an event by its representativeness in a population

Question 9

Availability heuristic

Answer 9

Frequencies of events are estimated based on the ease with which they can be retrieved (affect by recency and familiarity)

Question 10

Affect heuristic

Answer 10

Using emotional responses to influence quick judgements

Question 11

Recognition heuristic

Answer 11

When you know one category and not the other, you are likely to conclude that the recognized category has a higher frequency

Question 12

Anchoring-and-adjustment heuristic

Answer 12

You make an initial assessment (anchor), and then adjust it to the final estimate. The adjustment is often not sufficient

Question 13

People often ignore _________. This is the information about the normal frequency of an event in a given population

Answer 13

Base-rate information

Question 14

Biases

Answer 14

Thinking errors people often make when making decisions

Question 15

What are the 3 biases?

Answer 15

1. Illusory correlation
2. Overconfidence
3. Hindsight bias

Question 16

Illusory correlation

Answer 16

People think that two variables are statistically related (even when they’re not)

Question 17

Overconfidence

Answer 17

People overestimate themselves

-You can counteract with Crystal-ball technique where you imagine that your decision is wrong

-My-side bias: the overconfidence that only your view is correct in a confrontational situation

Question 18

Hindsight bias

Answer 18

When looking at a situation in retrospect, people often suspect that they can see all the signs that lead to a particular outcome

Question 19

Fallacies

Answer 19

Misconceptions that occur due to heuristics

Question 20

What are the 5 fallacies?

Answer 20

1. Gambler’s fallacy
2. Hot-hand effect
3. Conjunction fallacy
4. Double conjunction fallacy
5. Sunk-cost fallacy

Question 21

Gambler’s fallacy

Answer 21

An assumption that the probability of an event is influences by a previous event (e.g., not throwing tails for the 4th time)

Question 22

Hot-hand effect

Answer 22

A belief that a certain course of events will continue (opposite of gambler’s fallacy)

Question 23

Conjunction fallacy

Answer 23

People think that the probability of the combination of two events (A and B) is greater than the probability of one event (A or B) on its own

Question 24

Double-conjunction fallacy

Answer 24

The combination of two events is considered more likely than each of the events individually

Question 25

Sunk-cost fallacy

Answer 25

People keep investing in a decision simply because they invested in it before and hope to recover the investment

Question 26

The expected utility theory claims ___

Answer 26

that people choose between different options perfectly using two factors: the expected utility (outcome) and the probability

Question 27

Criticism of expected utility theory

Answer 27

People show irrationality and violate invariance because people’s choices appear inconsistent

Question 28

The prospect theory claims ____

Answer 28

that we make decisions based on gains and losses form our starting point.

• Pain of losses is greater than pleasure from gaining

Question 29

Prospect theory: When people deal with potential gains, they are ___. With potential losses, they are ___.

Answer 29

When people deal with potential gains, they are risk-aversive. With potential losses, they are risk-prone

Question 30

Framing

Answer 30

The way options are presented have an impact on the choice

Question 31

What 2 factors in framing influence decision making?

Answer 31

1. The background information
2. Whether the questions is presented as a gain or a loss

Question 32

Temporal value asymmetry

Answer 32

People place more value on the future than on the past (also short-term over long-term)

Question 33

Psychological accounting principle

Answer 33

People make different decisions depending on how the outcome is felt or perceived

Question 34

What are 2 ways to improve decision making?

Answer 34

1. Using base-rate information more
2. Rely less on System 1 (intuitive, automatic), and more on System 2 (analytical, delibrate)