Tentamen Flashcards
(91 cards)
Normative
How people should be making judgments and decisions
Descriptive
How people actually make judgments and decisions
Prescriptive
Practical suggestions on designing judgment and decision-making processes based on normative and descriptive models.
Normative decisionmaking process
- Define the problem
- Identify the criteria
- Weigh the criteria
- Generate alternatives
- Rate each alternative on each criterion
- Compute optimal decision
System 1 thinking
intuitive, fast automatic, emotional, effortless system of decision making.
System 2 thinking
slow, effortful, conscious, explicit.
Accessibility
How easily something comes to mind – easily accessible perceptions from S1 have disproportionate weight on our judgments and decisions
Cognitive ease feels good – cognitive dissonance (doubt and uncertainty) are difficult and feel bad.
Determinants: perceptual salience, surprisingness, familiarity, when things are associated with emotion, with potential losses, in line with our current mindset.
Heuristics
Instead of answering a difficult question using S2, our first impulse is using S1 for easy accessible answer. Difficult questions are substituted for easier ones. Simple procedures to find adequate, often imperfect, answers to difficult questions. Simplified decisionmaker.
Types of Heuristics
- availability – things that come to mind easier are judged more likely
- representativeness – judgments influenced by how typical something is in its category
- confirmation – judgment influenced by what we expect
- affect – judgment affected by emotions.
Utility
Whatever is maximized – normative models do not tell what to maximize, they tell what we
should be doing to maximize whatever it is that we try to maximize.
humans are assumed to have utility functions
Utility transitiity
A>B, B>C, then A>C
Connectedness
A>B, A<b></b>
EUT
Expected utility theory - choose option with highest EU - EU = utility of outcome * probability of outcome
Bayes’ s theorem
P(A|B) = ( P(B|A) x P(A) ) / P(B)
Risk neutral
Utility increases with wealth at constant rate
Risk aversion
Utility increases with wealth, but at a decreasing rate.
Concave, this implies risk aversion.
Value a sure thing higher than a risky thing, even if expected value is the same
incorporated in Expected Utility Theory – common assumption
Level risk aversion varies between individuals
Prospect theory
We hate uncertainty, unless it enables us to see a path out of a bad situation.
risk averse dealing with gains, risk seeking dealing with losses.
The certainty effect
outcomes that are almost, but not entirely, certain are given less weight than their probability justifies.
The possibility effect
Highly unlikely outcomes are given more weight than their probability justifies
Ambiguity Aversion
the Ellsberg paradox: we are willing to pay less for a vague choice than for a clear choice.
The endowment effect
We attach higher value to things that we own than to things that we do not own. - Loss aversion
Framing
The concept of framing is about presenting something as a gain or a loss
Tom Sawyer – framing an unpleasant task as a privilege or unique opportunity.
Negative formulation leads more often to risk seeking, positive to risk aversion.
Mental accounting
Refers to a set of cognitive processes
Use of mental accounts – people tend to have different accounts in their mind. Different accounts have different purposes. Transferring funds between accounts feels wrong. Gains and losses feel different, depending on which account they are booked.
Transaction utility
Individuals not only derive utility from a product itself, but also from the ‘deal’ through which they acquired the product. How much they are prepared to pay for a product depends on how good the deal is that they feel they are getting.
