Exam 3 Vocab - Class Notes Flashcards
(38 cards)
Expected Utility Theory (Utility Maximization)
Under uncertainty, we make decisions based on the probability of an outcome and how good/bad it would be if that outcome were to occur (our behavior doesn’t necessarily follow this theorem)
Expected Utility Formula
Utility of Consequence x Probability of Occurrence = Expected Utility
Value Function of Prospect Theory
A potential loss is perceived as more negative than an equivalent gain is positive
Prospect Theory
A model that predicts how people make decisions under uncertainty. It demonstrates that we’re differentially sensitive to the impact of gains and losses and that we consider utility relative to a reference point (e.g., current wealth) rather than absolute outcomes.
3 Points About Prospect Theory
1) Losses loom larger than equivalent gains.
2) We tend to be risk averse when it comes to gains (we want a sure gain) but risk-seeking when it comes to losses (we dread a sure loss).
3) Reference point matters.
Problems with Expected Utility Theory
1) In the real world, it’s difficult to estimate the utility of consequence (e.g., affective forecasting)
2) In the real world, it’s difficult to estimate the probability that an event will happen (e.g., hot hand and gamblers’ fallacies)
3) It’s not at all clear what cognitive processes underly these choices
Affective Forecasting
We predict things to be more extreme than the actually are (e.g., lottery winner expect to feel much happier when they win than they actually do)
Hot Hand
Consistently doing well or poorly
Gamblers’ Fallacies
Things that haven’t happened in a while are “due” to happen
2 Considerations About Decision Making
1) We do NOT always act in a way that an economist would see as “rational”
2) External factors have a large impact on the decisions we make
Algorithm
Procedure that, if followed correctly, will always yield the correct answer
Heuristics
Mental shortcuts people often use to make decisions (the majority of the time these will lead to the correct decision)
Anchoring and Adjustment (Heuristic)
The tendency to tie decisions to an often irrelevant starting point and adjust away from it (e.g., Mississippi river, moon, Milwaukee)
Availability Heuristic
The tendency to estimate the probability of an event by the ease with which instances can be brought to mind (e.g., firearm deaths, letter k, insanity plea)
Representativeness Heuristic
A strategy for making categorical judgments about a given person or target based on how closely the exemplar matches the typical or average member of the category, while ignoring the underlying base rate (e.g., Linda, Tim, Lawrence)
Cognitive Reflection Test (CRT)
Intuitive vs deliberative responses
Dual Process Theory
System 1: Intuition
1) Processes information rapidly
2) Requires little working memory capacity
3) Uses heuristics
System 2: Reasoning
1) Deliberate information processing
2) Requires working memory capacity
3) Can override heuristics
The Paradox of Choice
We have more options than ever before, which is presumably good, but we’re not benefiting from it psychologically (too many choices)
Nudges
The structuring of the choice environment (e.g., by governments and companies) to get people to act in a desired fashion
Precrastination
In some situations, people will begin tasks as quickly as possible, even at the expense of extra effort (e.g., the bucket task)
Language
A system of communication using sounds or symbols that enables us to express our feelings, thoughts, ideas, and experiences
Verbal Comprehension
The process of decoding language back into thoughts; Identify individual sounds (phonemes) → group sounds into words → group words into sentences → understand meaning
Verbal Fluency
The process of converting thoughts into language; Generate thought/idea → create sentence → transform into appropriate words → produce appropriate sounds
Phonemes
The smallest (basic) unit of sound whose combination creates words and if changed would alter the meaning of a word (lacks inherent meaning and are not directly tied to letters)
