PSY2002 S2 W8 Decision Making and Bias Flashcards
(48 cards)
What is Rational Choice Thoery?
most indicate that to be rationale one will calculate costs and benefits.
Therefore: rationale decision: would maximise value or utility
Norms are considered an important aspect of rationality
What are norms?
rules of action or thought which define optimality.
Rationality is a set of norms be consistent (coherence), correspond to reality (correspondence).
But nobody can agree on a complete set of norms for reasoning.
What are two biases?
Availability bias and framing bias
What is availability bias?
over-estimating the frequency of plane crashes (rare or memorable events)
What is the framing bias?
switching your decision based on the question framing (e.g. would you buy another ticket if you dropped it on the way to the cinema vs if you dropped £10 on the way to the cinema?)
What is the linda problem?
Linda is 31 years old, single, outspoken, and very bright. She studied philosophy at University. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-war demonstrations.
Which is more likely?
1. Linda is a bank teller (a person working in a bank).
2. Linda is a bank teller and is active in the feminist movement
What do most people pick in the Linda problem?
Most people opt for Linda is a bank teller and is active in the feminist movement. However option 2 is violating a norm of probability.
Option 2 must be less likely than Option 1
-Option 2 is a subset of Option 1
-Option 2 requires two things to be true, Option 1 only one
Most people intuit that option 2 is the answer, in defiance of the norms, specifically the laws of probability
=> hence most participants make a conjunction fallacy as they have made an error in reasoning by assuming that specific conditions are more probable than a single, more general condition
Violation of Norms and Conjunction Fallacy
So How should we make (rational) decisions?
Logical
Probabilities
Systematic consideration of all options
What is difficult in making decisions?
The future is uncertain
Need to assess potential Risks and Benefits
Choose a course of action to increase the chance of a positive outcome
Need to use knowledge to estimate probabilities of future events
What is rationality?
probability based on value
Monetary Terms: expected value (value an investment will have in the future), a good bet is one for which the expected value is greater than the amount invested.
Rational choice would be invest to mximise expected value.
Tendency of people to accept sure outcome over a riskier outcome is referred to as risk aversion. But value is not always the most important factor in our decision making
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What is expected utility theory premise?
EU Theory is a theory of decision under risk/uncertainty.
Each option leads to one set of outcomes.
Where the probability is known.
EU is the weighted average of satisfaction from the possible outcomes
Calculating the option with the highest expected utility is a decision-making method. Rational decision making may assume that we choose the option that maximises our utility
Biases are defined by what?
Against norms (standards of rationality)
What does expected utility theory define?
Expected Utility Theory (E = p*U) defines one standard and makes predictions about how uncertainty should affect decisions
What are heuristics?
Heuristics are designed to be ecologically rational – to provide quick, good enough choices
What does dual process theories suggest?
Dual process theories suggest we have a fast stem 1 and a slow system
Are Biases flawed?
Biases are not flaws in reasoning they are a way of understanding how reasoning is done
What are implications for investiatin gbias?
If you see a bias try and understand how people understand a decision:
their perception of costs & benefits
their experience of similar decisions
their assumptions about the environment
Do not conclude they are irrational!
Where do you see biases?
Decision biases we discussed today are features of normal cognitive processes (e.g. memory, attention, planning)
Can affect experts and laypeople alike
Biases are part of thinking, not an optional extra
What is the dual process theory?
A psychological theory which posits two processes which work at the same time, or support the same capacity
* usually work together
* can be in conflict with each other
* one usually has system 1-like properties, one system 2-like properties
What are the predictions of the dual process theory?
features should go together (so, for example, no conscious heuristic thinking, no unconscious rational thinking)
people should switch between modes of thinking in the right circumstances (more time -> more deliberative thinking)
What is the diminishing Marginal Utility of wealth?
Additional satisfaction gained by a unit of goods/services
Basic idea is that as the amount of money one has increases each addition to one’s fortune becomes less important, from personal, subjective point of view.
extra £1000 means very little to Bill Gates, an extra£1000 for a university student would mean quite a lot
How is value not ulitility ?
Ulitity is compressed with respect to value. You do not enjoy 10 pizzas 10 times more than 1 pizza, although 10 pizzas still costs 10 times more than 1 pizza)
What is utility?
Utility is how much you enjoy or prefer it, the degree to which it contributes to your overall well-veing or satisfies your desires.
What is an example of value not being utility?
a) Option a - coin flips- head win £1000, tails win 0,
b) Option b - no coin flip = £499
Expected Value b = £499, a = £500 but most still opt for b.
Utility attached to first £499 is greater than the additional £501
