Thinking and deciding

Question 1

Normative theory

Answer 1

The theory of how we should choose among possible actions under ideal conditions

Question 2

Conflicts

Answer 2

Every decision implies a conflict
Between desirability and probability
Between goals
Between your own and other’s goals

Question 3

UTILITY

Answer 3

A measure of the desirability of the consequences of each option -how much the option allows to achieve goal -

Question 4

Utility theory

Answer 4

Became the normative benchmark to evaluate decisions.
Choose the option that will yield the greatest total utility
Important: Uncertainty has to be taken into account

Question 5

UNCERTAINTY

Answer 5

Tradeoffs between utility and probability.
known probabilities
→decision under risk unknown probabilities →decision under ambiguity

Question 6

Expected Utility Theory

Answer 6

Expected value EV= p of outcome x v of the
payoff
EV= sum𝑖𝑝𝑖∗𝑣𝑖

Question 7

Is Utility Theory normative?

Answer 7

• Attackers: people are generally rational, better descriptive model will lead to better normative models
• Defenders: irrationality exists, better descriptive models can only tell us where people fail

Question 8

Is Utility Theory normative? Yes and why?

Answer 8

• In the long run, this decision rule is the one that helps us achieve our goals to a greater extent
• Expected utility is implied by certain principles (“axioms”) that are closely related to the idea of rational decision making

Question 9

WEAK ORDERING

Answer 9

Two outcomes can always be compared (X > Y; Y > X; X = Y)

Question 10

TRANSITIVITY

Answer 10

Mathematical property concerning relations among elements (X > Y; Y > Z; X > Z)

Question 11

SURE THING PRINCIPLE

Answer 11

If there is some state of the world that leads to the same outcome no matter what choice you make, then your choice should not depend on that outcome

Question 12

Descriptive theory

Answer 12

Systematic Violations of normative principles

Question 13

3 types of Utility

Answer 13

• Experienced utility :The experience itself
• Predicted utility:Predictive judgment about the experience (based on memory)
• Decision utility:The utility that is inferred from choices

Question 14

Predicted utility

Answer 14

We make very inaccurate predictions
❖Unrepresentative memories
❖Too essentialized
❖Decontextualized
❖Too abbreviated

Question 15

Experienced utility

Answer 15

Normative models (ideally your decisions should agree with your experienced utility

Question 16

Prospect Theory

Kahneman & Tversky (1979)

Answer 16

Descriptive theory of decisions under uncertainty
How and why our choices deviate from the normative model of expected-utility theory
▪Porbability x utility (as EU theory)
▪Probabilities are distorted
▪Utility is considered as change from a reference point

Question 17

PROBABILITY

Answer 17

We do not treat probabilities as they are stated

But we distort them according to a particular function“π function”

Question 18

CERTAINTY EFFECT

Answer 18

People’s preferences are attracted by absolute certainty

Question 19

“π function”

Answer 19

People are more sensitive to changes in p near to natural borders (0 and 1)

Question 20

“π function”

Answer 20

People are more sensitive to changes in p near to natural borders (0 and 1)

Question 21

LOSS AVERSION

Answer 21

Gains and losses are evaluated without regard to our total wealth.
Losses are more serious than equivalent gains.