Decision Making

Question 1

Normative theory

Answer 1

concerned with how people should make decisions, assume that people act rationally

Question 2

Descriptive theories

Answer 2

concerned with how people actually make decision and behave

Question 3

What is the main idea behind utility theory?

Answer 3

People act rationally to maximise expected utility

Question 4

what is utility?

Answer 4

Subjective value we attach to a given outcome

Question 5

what is expected utility?

Answer 5

A subjective measure, expected utility represents the average satisfaction or value a person expects to get from a decision when outcomes are uncertain.

Question 6

expected utility formula

Answer 6

P( given outcome) x utility of outcome

Question 7

In utility theory is starting point relevant?

Answer 7

NO, there is an emphasis on final amount, not gain or loss, starting point is irrelevant.

Question 8

when Ps are told they have 100% chance of gaining £500 or 50% chance of gaining £1000. which are they more likely to pick and why, according to utility?

Answer 8

Many choose the first (“safe”) option – why?
– Because utility (or subjective value) is not necessarily proportional to
monetary amount!

Question 9

What is prospect theory?

Answer 9

Developed as a better descriptive (if not normative) account of
human decision-making than utility theory

Question 10

What are the main assumptions of Prospect theory?

Answer 10

1. Individuals identify ‘reference point’ representing current state (starting point)
2. Individuals more sensitive to potential loss than gains (loss aversion)
3. Individuals overweight rare events

Question 11

How does Classical Utility Theory treat gains vs. losses

Answer 11

Indifferently — only the final state of wealth matters.

Question 12

How does Prospect Theory treat gains vs. losses?

Answer 12

Asymmetrically — losses feel worse than equivalent gains (loss aversion).

Question 13

What is the shape of the value function in Prospect Theory?

Answer 13

S-shaped — concave for gains, convex for losses.

Question 14

How is risk behavior modeled in Prospect Theory?

Answer 14

Risk-averse for gains, risk-seeking for losses.

Question 15

Does framing matter in Classical Utility Theory?

Answer 15

❌ No — only final outcomes matter.

Question 16

Does framing matter in Prospect Theory?

Answer 16

Yes — how choices are presented (gains vs. losses) affects decisions.

Question 17

What does “risk-seeking for losses” mean in Prospect Theory?

Answer 17

When people face a sure loss, they often prefer a risky option that could help them avoid the loss, even if it could lead to a larger loss — they take more risk to try to “break even.”

Question 18

what is value function?

Answer 18

The value function describes how people subjectively evaluate gains and losses relative to a reference point.

Question 19

loss aversion

Answer 19

Losses feel worse than equivalent gains

Question 20

does loss aversion become stronger when stakes become higher or lower?

Answer 20

when they become higher

Question 21

In prospect theory graph - concave is for

Answer 21

Gains - showing diminishing sensitivity - 100 gain feels good but 200 does not feel twice as good

Question 22

In prospect theory graph - convex is for

Answer 22

losses - People take more risk to avoid sure losses - it is steeper for losses - Losses feel ~2× more painful than equivalent gains feel good.

Question 23

Framing effect

Answer 23

Peoples decision are influenced by how the situation is framed

Question 24

Gain frame study

Answer 24

• people told there is a disease which is expected to kill 600 people
• there are two ways to combat disease
• – If programme A adopted, 200 people will be saved
  – If programme B adopted, there is a 1 in 3 probability 600 people will be saved,
  and a 2 in 3 probability that no people will be saved

Question 25

do more people choose – Programme A adopted, 200 people will be saved OR – Programme B adopted, there is a 1 in 3 probability 600 people will be saved, and a 2 in 3 probability that no people will be saved ?

Answer 25

– 72% chose programme A, despite fact that both will on average save 200 people

Question 26

Do people choose ... – Programme C adopted, 400 people will die OR – Programme D adopted, there is a 1 in 3 probability nobody will die, and a 2 in 3 probability that 600 people will die ?

Answer 26

– 78% chose programme D (opposite to Gain-frame condition) – Loss aversion to high probability (100%) that 400 people will die? – Overweighting rare events to 1/3 probability that nobody will die

Question 27

Overweighting rare events

Answer 27

In prospect theory people overweight small probabilities, meaning they give more importance to rare events than is statistically justified. If there's a 1% chance of winning a jackpot, people might treat it like it’s more likely than it actually is.

Question 28

when a question stated ... .Reducing the voting age from 18 to 16 Giving 16-17 year olds the right to vote

Answer 28

Reducing the voting age from 18 to 16 —> more opposed Giving 16-17 year olds the right to vote —> more agreed

Question 29

is the framing effect always true?

Answer 29

when programmes completely described - framing effect disappeared

Question 30

sunk cost effect

Answer 30

“tendency for people to pursue a course of action even after it has proved to be suboptimal, because resources have been invested in that course”

Question 31

e.g., of sunk cost effect

Answer 31

“throwing good money after bad” * Dawes (1988) – $100 deposit for hotel room – On route to hotel, become ill – Think you will probably have more pleasurable time at home – Do you keep going or turn back – Many decide to keep going – sunk-cost

Question 32

when experimemnters Gave MBA (business) students full information about investments, did they show sunk cost effect?

Answer 32

– Showed opposite of sunk-cost i.e., more likely to switch – Certain groups don’t show the effect, so not universal?

Question 33

When decision based on descriptions - are their probabilities more likely to be overweighted or underweighted?

Answer 33

Over

Question 34

When decision based on experience- are their probabilities more likely to be overweighted or underweighted?

Answer 34

under

Question 35

Loss Neutrality

Answer 35

When using small amounts - loss aversion is not apparent

Question 36

What is a theoretical limitation of Prospect Theory?

Answer 36

It doesn’t explain why the value function exists — for example, why are people loss averse in the first place?

Question 37

Can Prospect Theory's predictions fail in some situations?

Answer 37

✅ Yes — many of its predicted effects (like loss aversion) can disappear or reverse in specific experimental contexts.

Question 38

Does Prospect Theory account for individual differences?

Answer 38

❌ No — Prospect Theory doesn’t explain why different people react differently to the same gains or losses.

Question 39

Give examples of individual differences that Prospect Theory doesn’t explain.

Answer 39

People with high self-esteem may prefer risky gambles. People high in narcissism may show high sensitivity to rewards and low sensitivity to losses.

Question 40

Where do these individual differences come from (which Prospect Theory doesn't cover)?

Answer 40

They likely come from personality traits, emotional regulation, biological factors, and life experiences, which are outside the scope of Prospect Theory.

Question 41

impact bias

Answer 41

overestimation of intensity/duration of negative emotions to loss - overestimating the emotions - they are loss averse because they would rather not experience the negative emotion

Question 42

when Ps were asked how they'd feel about a $3 loss or a $5 gain how did they say they would feel?

Answer 42

$3 loss predicted to have greater impact on happiness than $5 gain

Question 43

What happened when participants made the decision themselves?

Answer 43

Losses were experienced as regret.

Question 44

What happened when the computer made the decision?

Answer 44

Losses were experienced as disappointment.

Question 45

What key psychological factor did the Georgetta study identify?

Answer 45

Agency — whether you made the decision or not — influences the type of negative emotion felt after a loss.

Question 46

Why is the Georgetta et al. study important for understanding decision-making?

Answer 46

It shows that emotional responses to loss depend on perceived control, which is not explained by Prospect Theory alone.

Question 47

omission bias

Answer 47

Preference to inaction when engaged in risky decision making

Question 48

When Ps don't want to get the child vaccinated - if they got ill from the unvaccinated disease - would they feel more responsible than if the vaccination made them ill?

Answer 48

- Higher anticipated responsibility and regret if child experienced adverse reaction due to vaccination – i.e., “it’s my fault” - In action - you feel like you’ll regret not doing anything more than doing something

Question 49

Pulmonologists treating lung disease - are they more likely to do an optimal strategy when given or not given the option?

Answer 49

Less likely to choose best management strategy when given option to do nothing (40%) vs when not given option (59%)

Question 50

Status quo bias

Answer 50

- Prefer to accept status-quo than change decision – Samuelson & Zeckhauser (1988) - Retired people keep same allocation of retirement funds, despite no financial cost in changing

Question 51

Why does accountability increase the sunk-cost effect?

Answer 51

When people are accountable for their decisions (e.g., to others), they feel a greater need to justify their initial choices and tend to stick with them longer, even if it’s not rational.

Question 52

Satisficing

Answer 52

choosing first option that satisfies individual’s minimum requirements

Question 53

bounded rationality

Answer 53

decision making ‘bounded’ by * environmental constraints (e.g., information costs)

Question 54

Elimination by aspect theory

Answer 54

Serial elimination based on specific criteria until one option remains * Order can matter! * Can’t handle trade-offs (e.g., distance from university vs rental cost) - but you might just pick the first house that meets ur minimum standards

Question 55

What was the focus of the Galotti et al. (2007) study?

Answer 55

It examined how US university students choose their major and how they process information during the decision-making process.

Question 56

How did higher ability or more education affect the decision-making process?

Answer 56

Students with higher ability or more education tended to consider more attributes at one time when making their decisions.

Question 57

Memory guided decision making

Answer 57

Often use past experience to make rapid, pressured decisions

Question 58

How do experts make fast decision?

Answer 58

Retrieved previously ‘similar’ situation and evaluate whether previous decision appropriate – i.e., no need to generate new decision * Experts typically characterised novel situations as examples of familiar situations * Retrieved and utilised previous decision