lecture 15- decision making Flashcards
(29 cards)
how are judgements and decisions different?
use judgements to guide decisions
judgement- calculating what is more likely, emphasiese accurate assessment of what is happening
decision- acting based on that, emphasise consequences (what happens after i make this decision)
what are meant by normative theories?
- concerned with how people should make decisions
- assumption that people act rationally (Bayes)
what are meant by descriptive theories?
- concerned with describing how people actually make decisions
- pay attention to how well the theory accounts for human behaviour (but doesn’t give much explanation as to how rational we are)
what is utility theory?
- assumes that people act (rationally) to maximse ‘expected utility’
- where expected utility = p(outcome) x outcome utility
- utility is the subjective value we attach to a given outcome (this may not be rational- where theory is more descriptive)
- calculate expected utility of each outcome and choose option with greatest expected utility
what is prospect theory?
- better descriptive account than utility theory
1. individuals identify ‘reference point’ representing current state (starting pt is important)
2. individuals are more sensitive to potential loss than gains
3. individuals overweight rare events
what is a utility function?
- function based on how sensitive individuals are to gains/losses
- relationship between utility (subjective value) and actual gains/losses (objective value)
what is the framing effect?
- decisions influences by how the situation is framed
- example = asian disease problem
- gain-frame condition (200 saved OR 1 in 3 chance all 600 saved)
- loss-frame condition (400 die OR 1 in 3 no one dies)
- same odds, just using different words (saved vs. die)
- p’s choose first for gain-frame and second for loss-frame
- shows loss aversion to high probability that 400 will die (framing as losing 400 people vs saving 200)
- overweighting rare events to 1/3 probability that no one will die
when is the framing effect not present?
- when options completely described (example is ambiguous)
- when encouraged to be slow and deliberate in weighing options
what is a real-world example of the framing effect?
‘reducing voting age from 18 to 16’ (opposed)
‘giving 16-17 year olds the right to vote’ (supported)
what is the sunk cost effect?
tendency for people to pursue a course of action even after it has been proved to be suboptimal, because resources have been invested in that course
what finding goes against sunk-cost effect?
give business studnets full info about investments, showed opposite of sunk-cost (more likely to switch)
what is meant by overweighting rare events?
- thinking rare events are more likely than they are
- mostly present in labs, explains buying lottery tickets
what did Hertwig (2004) find about real-world decisions that involve experience?
- when decisions are based on descriptions -> p’s overweight rare event
- when decisions based on experience -> underweight rare event
- due to low sampling = never experience rare event so underweight
- might be due to availability heuristic (how easy it is to retrieve memory- which don’t have)
what is loss neutrality?
- losing/gaining £1 vs. £5
- prospect theory predicts loss aversion (pick chance of £1 over £5)
- but 50/50 split, might be because small amounts
- breaks down when using more extreme amounts (depends how big consequences are)
what are the similarities/differences between utility and prospect theory?
- prospect theory more detailed and predicts a wider range of phenomena (loss aversion, overweighting)
- both assume value function (utility function) which is non-linear between objective and subjective value
what do the prospect and utility theories not explain?
- why value function exists (why are we loss averse)
- many predicted phenomena can disappear be reversed (theories can explain some but not all)
- doesn’t account for individual differences on its own (high self-esteem = prefer risky gambles, high narcissism = high sensitivity to reward and low sensitivity to loss)
what are the examples of negative emotions possibly explaining loss aversion?
- (Kermer) $3 loss had larger impact on happiness than $5 gain (no actual experienced difference by anticipation differs- impact bias- overestimation of intensity/duration of negative emotions to loss)
- (Giorgetta) decisions made by self or computer- loss felt as regret if decision made by them, disappointment if made by computer
(agency affects emotional response to loss)
what is omission bias?
- preference for inaction when engaged in risky decision-making (when one of the options is doing nothing)
- won’t regret lack of action as much compared to if did action that end up regretting (doing nothing doesn’t feel like a decision)
what are examples of omission bias?
- (Brown) parents willing to accept higher risk of child having disease than child suffering adverse reaction to vaccination
- (Wroe) higher anticipated responsibilty and regret if child experienced adverse raction due to vaccination
- (Aberegg) pulmonologists treating lung disease- less likely to choose best management when given option to do nothing vs when not given that option
what is status-quo bias?
- people prefer to accept status quo (already chosen one course of action) than change decision
- retired people keep same allocation for retirement funds despite no financial cost in changing (rather keep to existing even though changing might give them more in the long run)
- but might be cost in terms of effort in changing
what is the effect of accountability in decision-making?
- increased accountability leads to increased sunk cost effect
- because experience greater need to justify intial decision, so stick with it for longer
- how people perceive your decision affects you
normatively, how should people make complex decisions?
- identify attributes relevant to decision (employability, enjoyment, difficulty)
- decide how to weight attributes (whether enployability is more important than enjoyment)
- list all options under considerations (all major options)
- rate each option on each attribute (enployability etc. of each one)
- obtain total utility- select option with highest
BUT unlikely to always work this way- could be large numbers of options
what is meant by bounded rationality?
decision-making ‘bounded’ by environmental and cognitive constraints- we are as rational as permitted within these constraints
- satisficing- choosing first option that satisfies individual’s minimum requirements
what is the elimination-by-aspects theory?
- serial elimination based on specific criteria until one remains
- order can matter
- can’t handle tradeoffs (distance vs. rental cost)
