Lecture 8 - Decision making Flashcards
1
Q
What is decision making?
A
- choosing between various options
- decisions assessed relative to their consequences
- typically measured in terms of gains and losses
2
Q
What are the types of decisions?
A
- risky vs riskless
-> risky = chance of loss
-> riskless = no loss with a poor decision - single attribute e.g. buying wine when you know nothing about wine so may base it off the price vs multi-attribute e.g. which house to buy - may base it off multiple factors
- one-stage vs multi-stage
3
Q
Single attribute, risky decisions?
A
- normative approach
- a rational decision maker will choose the option with the greatest value
- assumes
1. full knowledge of all possible options, and the value of all outcomes
2. infinitely sensitive to subtle differences in value
3. decision makers are motivated to maximise value - led to the development of the expected value theory
4
Q
Expected value theory?
A
- involves calculating the expected value of different decisions and choosing the most valuable decision
- assumes:
-> we know the relevant probabilities of the outcome
-> we can assign a value to the outcome
-> either decision is better than no decision - expected value = probability of outcome x value of the outcome
- is based on outcome over a no. of trials
5
Q
Subjective expected utility theory (SEU)?
A
- use subjective estimate of probability = problematic
- utility = the subjective value we attach to an outcome
- expected utility = probability of outcome x utility of the outcome
6
Q
Tversky & Kahneman?
A
- set out to test SEU empirically
- identified some biases in decision making
-> loss aversion
-> risk aversion
-> risk seeking
7
Q
Loss aversion?
A
- The finding that losses have a greater subjective impact on individuals than gains of the same magnitude
- We are more sensitive to losses
8
Q
Risk aversion?
A
- A preference for certain gains over potentially larger (but less certain) gains
9
Q
Risk seeking?
A
- people take more risks to avoid losses
10
Q
Framing effects?
A
the finding that decisions can be influenced by situational aspects
11
Q
Omission bias?
A
- A biased preference for risking harm through inaction compared to risking harm through action
12
Q
Evaluation?
A
- Expected value theory = best most rational decisions
- Prospect Theory accounts for many biases in decision making
-> We rarely make decisions based only on utility
-> Can be difficult to evaluate the probability of many outcomes
-> Doesn’t reflect the social, moral and emotional aspects of decision making
-> Doesn’t account for individual differences in decision making
13
Q
Complex decision making - multi-attribute utility theory (MAUT) Wright 1984?
A
- identify all relevant attributes, give them a weighting, rate each attribute for all options, calculate utility for each option, pick option with maximum utility
-> gives ‘best’ outcome, but is time consuming, complex, and requires knowledge of what all the relevant attributes are
14
Q
Complex decision making - bounded rationality & ‘satisficing’ Simon 1957?
A
- Decision making is as rational as possible, given situational and cognitive constraints
- Satisficing: Identifying minimum requirements and selecting first option that meets them
- Gives good, but not optimal decisions
- Associated with better quality of life
15
Q
Complex decision making - elimination by aspects Tversky 1972?
A
- Consider each aspect in turn, selecting best options & eliminating others until only 1 remains
- May be used to reduce options to make MAUT more manageable
