Flashcards in Decision-making Deck (55)
What types of decision can we make?
1. Riskless decisions
2. Decisions under risk
3. Decisions under uncertainty
What are riskless decisions?
The actual outcomes of the different options are known
Decisions are 'riskless'
What are decisions under risk?
The probabilities of the outcomes are know but the ACTUAL outcome is unknown
There is an element of risk
What are decisions under uncertainty?
The probabilities of the outcomes are unknown
We might not know all possible outcomes
What must we estimate before we make a decision?
We must estimate what the outcome will be & the probability of the outcome happening
What are the normative theories (models) of decision-making?
1. Expected value model
2. Expected utility model
3. Subjective expected utility model
What do normative theories of decision-making explain?
What we should do in an idealised version of the world
From which model do normative theories of decision-making come from?
Economic models of choice
What do normative theories of decision-making assume humans are?
Assume that we are rational - that we have time, space & all of the info we need to make a decision
Assume that we always weigh up costs & benefits of potential outcomes
What distinction is at the centre of the framework of normative theories of decision-making?
A distinction between info about what we want (utilities) & what we believe is true about the situation (expectations)
What does the Expected Value (EV) model state that all outcomes are assessed on?
All outcomes are assessed on the probability of occurrence x monetary value
Give an example of an EV model question.
Pps must choose between:
a) £80 with p = 0.20, or
b) £100 with p = 0.15
Pps should choose a) over b)...
a) EV = £16, b) EV = £15
What is a limitation of the EV model?
Not everything can have a monetary value
What is 'expected utility'?
A type of subjective value that isn't related to monetary values but the EU model has similar features to the EV model
What does the Expected Utility (EU) model state that all outcomes are assessed on?
All outcomes are assessed on the probability of occurrence x utility
What does the Expected Utility (EU) model claim that we do when making a decision?
Work out which outcome has the greatest utility (= subjective value)
When are EV & EU good to use?
When we have the probability of occurrence value
When do we use the Subjective Expected Utility (SEU) model?
When we don't have the probability of occurrence value
What do we use the Subjective Expected Utility (SEU) model for?
Working out the perceived likelihood of something happening
What does the Subjective Expected Utility (SEU) model state that all outcomes are assessed on?
All outcomes are assessed on the subjective probability x utility
We rely on estimates based on info around us
What assumptions do models make based on the SEU of choice?
1. We seek to maximise SEU (want to choose the option with the biggest utility gain)
2. Transivity of preferences (our preferences are well-ordered)
3. Invariance of preferences (our preferences stay the same, regardless of how the options are described - descriptive invariance - or how we make our choice - procedural invariance)
4. We are rational & consistent (we don't change our choices from one similar situation to another)
Who proposed elimination by aspects?
What is the process of elimination by aspects?
1. Start with the most important attribute & set a cut-off value for that attribute
2. Eliminate all alternatives with values below the cut-off
3. Continue with the next most important remaining attribute(s) etc. until there is only one left
When do we use elimination by aspects?
When we are faced with an important choice & have to choose between many options
What does elimination by aspects aim to do?
Cut down our choices to make it feel manageable
What are limitations of elimination by aspects?
X it doesn't guarantee that you will end up with the best overall choice
X because of the order that you consider the attributes, you might rule out an option that could have actually been the best choice (when weighted against all the other options)
Who proposed satisficing?
What is the process of satisficing?
1. Consider one alternative at a time in the order that they are presented
2. Each attribute of the current alternative is compared to a cut-off standard
3. If an attribute doesn’t meet the standard, it is rejected
4. The first alternative to pass all cut-offs is selected
What does satisficing involve?
Looking at the whole package one-at-a-time as the options present themselves to you
You set a minimum standard across the board
We accept the first option that meets the minimum criteria
If we see many bad options at the beginning, we may lower our cut-off standard