Week 10

Question 1

Objectives:

Explain, with examples, the role of heuristics in common errors of judgment and decision-making.

Explain, with examples, prospect theory, loss aversion and the sunk cost effect—what are their implications for decision-making in everyday life?

Answer 1

1 Tversky and Kahneman proposed three heuristics—availability, representativeness, and anchoring and adjustment. Subsequent work has identified many more. Heuristics that underlie judgment are called “judgment heuristics”.

Question 2

What is the bounded rationality framework?

Answer 2

Human beings try to make rational decisions (such as weighing the costs and benefits of a choice) but our cognitive limitations prevent us from being fully rational.

Question 3

What is the bounded rationality framework?

Answer 3

Human beings try to make rational decisions (such as weighing the costs and benefits of a choice) but our cognitive limitations prevent us from being fully rational.

Question 4

Bazerman and Moore (2013) outline the following six steps that you should take to make a rational decision:

Answer 4

(1) define the problem (i.e., selecting the right graduate program),
(2) identify the criteria necessary to judge the multiple options (location, prestige, faculty, etc.).
(3) weight the criteria (rank them in terms of importance to you),
(4) generate alternatives (the schools that admitted you),
(5) rate each alternative on each criterion (rate each school on each criteria that you identified, and
(6) compute the optimal decision.
Acting rationally would require that you follow these six steps in a fully rational manner.

Question 5

How are biases created?

Answer 5

By the tendency to short-circuit a rational decision process by relying on a number of simplifying strategies, or rules of thumb, known as heuristics.

Question 6

What are heuristics?

Answer 6

Strategies that allow us to cope with the complex environment surrounding our decisions. Unfortunately, they also lead to systematic and predictable biases.

Question 7

One critical path to fixing our biases is provided in Stanovich and West’s (2000) distinction between System 1 and System 2 decision making.
System 1
System 2

Answer 7

System 1 processing is our intuitive system, which is typically fast, automatic, effortless, implicit, and emotional.

System 2 refers to decision making that is slower, conscious, effortful, explicit, and logical. The six logical steps of decision making outlined earlier describe a System 2 process.

Question 8

The role of heuristics

Answer 8

When we are making decisions, any initial anchor that we face is likely to influence our judgments, even if the anchor is arbitrary. That is, we insufficiently adjust our judgments away from the anchor.

Question 9

The role of heuristics

Answer 9

When we are making decisions, any initial anchor that we face is likely to influence our judgments, even if the anchor is arbitrary. That is, we insufficiently adjust our judgments away from the anchor.

Question 10

What is anchoring

Answer 10

The bias to be affected by an initial anchor, even if the anchor is arbitrary, and to insufficiently adjust our judgments away from that anchor.

Question 11

Heuristics

Answer 11

Cognitive (or thinking) strategies that simplify decision making by using mental short-cuts.

Question 12

Judgement

Answer 12

Involves deciding on the likelihood of various events using incomplete information. For example, you might use information about your previous examination performance to work out the probability you will succeed in your next examination. What matters in judgement is accuracy.

Question 13

Decision making

Answer 13

• Involves selecting one option from several possibilities. You probably had to decide which university to attend, which courses to study and so on.
• The factors involved in decision making depend on the importance of the decision. For example, the processes involved in deciding which career path to follow are much more complex and time-consuming than those involved in deciding whether to drink Coca-Cola or Pepsi-Cola!

Question 14

Judgement often forms an important initial part of the decision-making process.

Answer 14

For example, someone deciding which car to buy might make judgements about how much various cars would cost to run, how reliable they would be and how much they would enjoy owning each one.

Question 15

Base rate information

Answer 15

The relative frequency of an event within a given population.

According to Koehler (1996), the “relative frequency with which an event occurs or an attribute is present in the population” is called the base rate

Question 16

Base rate information

Answer 16

The relative frequency of an event within a given population.

According to Bayes’ theorem, people making judgements should take account of base-rate information (the relative frequency with which an event occurs within a population).

Thus, many people use base-rate information when they understand the underlying causal factors.

In sum, we often use base-rate information in everyday life when we possess relevant causal knowledge. We also use such information when it is advantageous to us but ignore it when it is disadvantageous to us.

Question 17

Heuristics

Answer 17

are “strategies that ignore part of the information, with the goal of making decisions more quickly, frugally, and/or accurately than more complex methods”.
“Heuristics primarily serve the purpose of reducing the effort associated with a task.
a) They are ‘rules of thumb’ that allow us to make quick decisions
b) They allow us to cope with the complex environment surrounding our decision
c) They are not always reliable

Question 18

Representativeness heuristic

Answer 18

Our liking for heuristics can lead us to ignore base-rate information. More specifically, we use the
:which involves deciding an object or person belongs to a given category because it/he/she appears typical or representative of that category. Thus, for example, Jack’s description sounds like that of a typical engineer.

When people judge the probability that an object or event (A) belongs to a class or process (B), they will often apply the representativeness heuristic

Question 19

The conjunction fallacy

Answer 19

The mistaken belief that the conjunction or combination of two events (A and B) is more likely than one event (A or B) on its own.
Someone that goes to protests is more likely to be two things than just one. A feminist and a bank teller.

Question 20

Availability heuristic

Answer 20

The frequencies of events can be estimated on the basis of how easy or hard it is subjectively to retrieve them from long-term memory.
Causes of death that attract much publicity (e.g., murder) were judged more likely than those that do not (e.g., suicide) even when the opposite was the case. These findings suggest people use the availability heuristic.

Doctor used availability heuristic because he was overly influenced by the numerous recent cases of viral pneumonia, which made that disease spring to mind, when really is was a reaction to asprin.

Question 21

Pachur argued that there are three ways of explaining people’s judged probabilities or frequencies of various causes of death.

Answer 21

1. First, people may use an availability heuristic based on their own direct experiences.
2. They may use an availability heuristic based on media coverage of causes of death as well as their own experience (availability by total experience).
3. They may use the affect heuristic , which they defined as follows: “Gauge your feeling of dread that Risk A and Risk B, respectively, evoke and infer that risk to be more prevalent in the population for which the dread is higher”

He also found that based on recall of direct experiences was the best predictor of the judged frequencies of different causes of death. Judged risks were also predicted by the affect heuristic. Availability based on media coverage was the least successful predictor.

The above findings occurred because the participants used deliberate thought to override the availability heuristic. When participants decided which surname was more common under cognitive load, they used the availability heuristic and so the famous name was mistakenly selected 80% of the time.

Kahneman and Tversky’s approach is more applicable to less intelligent individuals than to more intelligent ones. In fact, intelligence or cognitive ability is almost unrelated to performance on most judgement tasks

Question 22

Affect heuristic

Answer 22

Using one’s emotional responses to influence rapid judgements or decisions.

Question 23

There are several limitations with the original heuristics-and-biases approach.

Answer 23

1. The heuristics identified by Kahneman and Tversky are vaguely defined. “One-word labels like ‘representativeness’ are theory surrogates [substitutes] that fail to place any testable constraints on the cognitive decision process.”
2. theorising based on the heuristics-and-biases approach has been limited. “What is disillusioning and disappointing . . . is how little precision, refinement, and progress has been obtained at the theoretical level.”
3. Failed to indicate the precise conditions eliciting the various heuristics or the relationships among different heuristics.

It is sometimes unfair to conclude people’s judgements are biased and error-prone. For example, most people judge skin cancer to be a more common cause of death than cancer of the mouth and throat, whereas the opposite is actually the case. People make this “error” simply because skin cancer has attracted considerable media attention in recent years. More generally, the heuristics-and-biases approach focuses on biased processing, but the problem is often with the quality of the available information.

4. Much research is detached from the realities of everyday life. Emotional and motivational factors often influence our judgements in the real world but were rarely studied in the laboratory until fairly recently (see Chapter 15). For example, the estimated probability of future terrorist attacks was higher in fearful individuals than those who were sad or angry.

Question 24

Tversky and Koehler put forward their support theory which posits:

Answer 24

An event appears more or less likely depending on how it sounds.

Eg. probability you will die on your next summer holiday is extremely low. However, it might seem more likely if you were asked, “What is the probability you will die on your next summer holiday from a disease, a car accident, a plane crash, or from any other cause?” Why is the subjective probability of death on holiday greater in the second case? According to support theory, more explicit event descriptions have greater subjective probability for two main reasons:
1 An explicit description often draws attention to aspects of the event less obvious in the non-explicit description.
2.Memory limitations may prevent people remembering all the relevant information if it is not supplied.

Although: An explicit description can reduce subjective probability if it leads us to focus on low-probability causes.

Providing an explicit description can reduce subjective probability by making it more effortful to comprehend an event.

Question 25

Limitations to support theory:

Answer 25

1. The reason as to why an explicit description generally increases an event’s subjective probability are not clear. 2. Explicit descriptions can reduce subjective probability if they lead individuals to focus on low-probability causes. 3. Explicit descriptions can also reduce subjective probability if they are hard to understand 4. The theory is oversimplified. It assumes the perceived support for a given hypothesis provided by relevant evidence is independent of the rival hypothesis or hypotheses. In fact, however, people often compare hypotheses and so this independence assumption is incorrect.

Question 26

Fast-and-frugal heuristics

Answer 26

Involving rapid processing of relatively little information. We possess an “adaptive toolbox” consisting of several such heuristics. It is also assumed these heuristics are often surprisingly accurate.

Question 27

Take the best, ignore the rest strategy has three components:

Answer 27

1 search rule : search cues (e.g., name recognition, cathedral) in order of validity; 2. stopping rule : stop after finding a discriminatory cue (i.e., the cue applies to only one of the options); 3. decision rule : choose outcome.

Question 28

Recognition heuristic

Answer 28

Using the knowledge that only one out of two objects is recognised as the basis for making a judgement. The most researched example of the take-the-best strategy is the recognition heuristic People will ignore

Question 29

How do people decide which heuristic to use on judgement tasks?

Answer 29

There is a two-step process. First, the nature of the task and individual memory limit the number of available heuristics. Second, people select one of them based on the likely outcome of using it and its processing demands.

Question 30

Hiatus heuristic

Answer 30

The rule of thumb that only customers who have purchased goods fairly recently remain active customers.

Question 31

Simple heuristics

Answer 31

Take the best strategy.

Question 32

Information redundancy

Answer 32

– redundancy is high when different cues provide similar information but low when cues provide different information. They argued that simple heuristics (e.g., the take-the-best strategy) are more effective in conditions of high than low redundancy. In crude terms, simple strategies work best (and are more likely to be used) when environmental information is simple.

Question 33

Natural sampling is

Answer 33

The process of encountering instances in a population sequentially. evolutionary history makes it easy for us to work out the frequencies of different kinds of events. In contrast, we are ill-equipped to deal with fractions and percentages, which helps to explain why many people perform so poorly on judgement problems involving base rates.

Question 34

Judgement performance is often much better when?

Answer 34

Problems are presented in frequencies rather than probabilities or percentages The percentage of participants showing the conjunction fallacy (arguing she was more likely to be a feminist bank teller than a bank teller) dropped by two-thirds

Question 35

Two strengths of the natural frequency hypothesis.

Answer 35

1. The use of natural or objective sampling could enhance the accuracy of many of our judgements. 2. judgements based on frequency information are often superior to those based on probability information.

Question 36

Dual-process theory:

Answer 36

Individuals do sometimes use complex cognitive processes. Such models have also been applied to performance on reasoning problems.

Question 37

According to Kahneman (2003, p. 698), probability judgements depend on processing within two systems:

Answer 37

System 1 : “The operations of System 1 are typically fast, automatic, effortless, implicit (not open to introspection) and often emotionally charged; they are also difficult to control or modify.” System 2 : “The operations of System 2 are slower, serial [one at a time], effortful, more likely to be consciously monitored and deliberately controlled; they are relatively flexible and potentially rule-governed.”

Question 38

How are these two systems related?

Answer 38

System 1 rapidly generates intuitive answers to judgement problems (e.g., based on the representativeness heuristic). These answers are then monitored or evaluated by System 2, which may correct them. Thus, judgement involves serial processing starting with System 1 and sometimes being followed by System 2. (Linda problem took 40% longer to complete.

Question 39

Dual process theory and cognitive load:

Answer 39

According to dual-process theory, cognitive load should reduce System 2 processing and so lead to answers making less use of base-rate information than answers produced without cognitive load.

Question 40

What did Chun and Kruglanski (2006) find regarding the dual process? Base-rate information The relative frequency of an event within a given population.

Answer 40

Cognitive load led to increased use of the information presented briefly. This was so regardless of whether this information referred to base rate or personality. Thus, usage of System 1 and System 2 processing depends more on how information is presented (e.g., briefly vs. lengthily) than on its content (i.e., base-rate vs. personality description).

Question 41

Which process is more effortful? How are these (dual systems) two systems related? System 1 rapidly generates intuitive answers to judgement problems (e.g., based on the representativeness heuristic). These answers are then monitored or evaluated by System 2, which may correct them. Thus, judgement involves serial processing starting with System 1 and sometimes being followed by System 2.

Answer 41

System 2 processing is more demanding and effortful than System 1 processing. The notion that people’s judgements are typically determined by System 1 rather than System 2 accords with most findings. Similar two process theories have proved reasonably successful in accounting for decision making and reasoning

Question 42

Decision making under risk:

Answer 42

(At one time) People behave rationally and select the best option.

Question 43

Decision making under risk:

Answer 43

(At one time) People behave rationally and select the best option.

Question 44

Normative theories

Answer 44

Based on how people should make decisions rather than how they actually make them.

Question 45

Subject effective utility theory

Answer 45

utility (the subjective value we attach to an outcome).

Question 46

When we chose between

Answer 46

When we choose between simple options, we assess the expected utility or expected value of each one via the following formula: Expected utility = (probability of a given outcome) × (utility of the outcome)

Question 47

Loss aversion for decision making

Answer 47

The greater sensitivity to potential losses than potential gains shown by most people engaged in decision making.

Question 48

What is assumed within prospect theory?

Answer 48

That people overweight low-probability events – rare events receive more weight than they should based on their actual probability of occurrence. This assumption may help to explain why people bet on the National Lottery where the chances of winning the jackpot are 1 in 14 million.

Question 49

The framing effect People would choose option A where 400 people can be saved, over option be where 400 can be saved but 200 will die. The same amount will live and die anyway. People will chose option where they can see people will be saved.

Answer 49

Much research has involved the framing effect in which decisions are influenced by irrelevant aspects of the situation. Framing effect The finding that decisions can be influenced by situational aspects (e.g., problem wording) irrelevant to good decision making. When all the programmes were completely described (or all incompletely described), the framing effect disappeared The framing effect can be eliminated when individuals think carefully about the available options.

Question 50

The deterministic option and probabilistic option

Answer 50

Wang (1996) argued that social and moral factors not considered by prospect theory can influence performance on the Asian disease problem. Participants chose between definite survival of two-thirds of the patients (the deterministic option) and a 1/3 probability of all patients surviving and a 2/3 probability of none surviving (the probabilistic option).

Question 51

The sunk cost effect

Answer 51

Investing additional resources to justify a previous commitment that has so far proved unsuccessful. A phenomenon resembling loss aversion is the sunk-cost effect . This is “a tendency for people to pursue a course of action even after it has proved to be suboptimal, because resources have been invested in that course of action”. This effect is captured by the expression “throwing good money after bad”. Individuals with complete memory of all the relevant information should be immune from the effect.

Question 52

Overweighting rare events

Answer 52

When decisions were based on descriptions, participants overweighted the probability of rare events as predicted by prospect theory. When decisions were based on experience via sequential sampling, however, participants underweighted the probability of rare events. This happened because participants in the sequential sampling or experience condition often failed to encounter the rare event at all.

Question 53

Conclusions from overweight rare event study

Answer 53

1. the weighting of rare events in decision making depends on the precise information provided to participants. 2. the findings from the sequential and open sampling conditions are inconsistent with predictions from prospect theory.

Question 54

Prospect theory

Answer 54

Is a behavioural model that shows how people decide between alternatives that involve risk and uncertainty (e.g. % likelihood of gains or losses). It demonstrates that people think in terms of expected utility relative to a reference point (e.g. current wealth) rather than absolute outcomes. Participants are adverse when stakes are high. Deemphasises individual differences.

Question 55

Contrary to prospect theory.

Answer 55

Suppose you were given the following choice: 1 2 50% to win £1 (1.20 euro); 50% to lose £1 (1.20 euro). 50% to win £5 (6 euros); 50% to lose £5 (6 euros). According to prospect theory, people are loss averse and so should choose (1) because it reduces potential losses. In fact, however, the typical finding across several studies using similar choices is loss neutrality – overall, participants do not favour one option over the other unless the stakes are high. This consistent finding is contrary to prospect theory.

Question 56

Loss aversion

Answer 56

In contrast, loss aversion is typically found on tasks where an individual’s attention is directed to gains or losses rather than both together.

Question 57

Personality influences individuals’ attitudes to risk.

Answer 57

Those high in self-esteem are more likely to prefer risky gambles than those low in self-esteem. This is because they have a strong self-protective system that helps them to maintain self-esteem when confronted by threat or loss. Individuals high in narcissism engaged in riskier stock-market investing because they have high sensitivity to reward but low sensitivity to punishment.

Question 58

Natural sampling

Answer 58

The process of encountering instances in a population sequentially.

Question 59

According to support theory

Answer 59

A more explicit description of an event will typically be regarded as having greater subjective probability than the same event expressed in other terms.

Question 60

Compared to participants who perform lower on general cognitive tasks, Stanovich and West's study found that more cognitively able students performed just as well on framing problems lower on general cognitive tasks.

Answer 60

that more cognitively able students performed just as well on framing problems

Question 61

Lerner et al. (2005) conducted an online study immediately after the terrorist attacks of 11 September 2001, and found

Answer 61

that participants who rated higher in fear estimated probability of future terrorist attacks to be higher than sad or angry participants

Question 62

Oppenheimer's (2003) study involving size assessments of cities close to the participants' homes indicated that

Answer 62

Relevant knowledge can override the heuristic

Question 63

According to von Neumann and Morgenstern (1947), the probability of a given outcome multiplied by the utility of the outcome yields the:

Answer 63

Expected utility

Question 64

Normative theories

Answer 64

Focus on how people should make decisions, rather than on how they actually make them

Question 65

The study by Dawes (1988), on whether to return from a holiday or not, is an example of

Answer 65

the sunk-cost effect

Question 66

Framing effects

Answer 66

Should only be found when what is at stake has real value for the decision maker, according to prospect theory.

Question 67

What aspect of risky decision making was studied by Josephs et al. (1992)?

Answer 67

Self esteem

Question 68

The relatively modern field of study that looks at the brain's involvement in decision making with monetary stakes has been called:

Answer 68

Neuroeconomics

Question 69

The phenomenon describing how people overestimate the intensity and duration of their negative emotional reactions of loss is called

Answer 69

Impact bias

Question 70

What aspect of risky decision making was studied by Wang (1996)?

Answer 70

Concerns about fairness

Question 71

Impact bias

Answer 71

Overestimation of the intensity and duration of negative emotional reactions to loss.

Question 72

Which brain areas are associated with emotion processing during decision making?

Answer 72

Several areas are involved but the amygdala and ventromedial prefrontal cortex have been the focus of most research. The amygdala is in the limbic system and is associated with several emotional states including fear or anxiety.

Question 73

Weller et al. found patients with damage to the ventromedial prefrontal cortex:

Answer 73

had elevated risk-seeking behaviour with respect to both potential gains and losses. This was especially the case when the probability of success was low.

Question 74

Patients with amygdala damage

Answer 74

showed elevated risk-seeking behaviour with potential gains but not potential losses.

Question 75

Omission bias

Answer 75

A biased preference for risking harm through inaction compared to risking harm through action. Not being immunised

Question 76

Regret and disappointment were both associated with losses, and rejoicing and elation

Answer 76

Associated with losses. with wins. Regret and rejoicing were associated with personally chosen gambles, whereas disappointment and elation were associated with computer-chosen gambles.

Question 77

De Martino et al. (2010) studied loss aversion in two women, SP and AP, who had suffered severe damage to the amygdala.

Answer 77

Neither woman showed evidence of loss aversion. In the words of De Martino et al. (2010), the amygdala may act as cautionary brake.

Question 78

An emotion such as anxiety can prevent us from

Answer 78

From maximising profit by making us unduly concerned about possible losses and therefore excessively afraid of taking risks.

Question 79

Prospect theory

Answer 79

1 Individuals identify a reference point generally representing their current state. 2 1 2 Individuals identify a reference point generally representing their current state. Individuals are much more sensitive to potential losses than potential gains; this is loss aversion . This explains why most people are unwilling to accept a 50:50 bet unless the amount they might win is about twice the amount they might loseIndividuals are much more sensitive to potential losses than potential gains; this is loss aversion . This explains why most people are unwilling to accept a 50:50 bet unless the amount they might win is about twice the amount they might lose - De-emphasises individual differences - Most people are risk adverse when the stakes are high. - People with high self esteem (they have a high self protective system) prefer risky gambles to those with low self esteem. - Individuals high in narcissism engaged in riskier stock-market investing because they have high sensitivity to reward but low sensitivity to punishment. - It is assumed within prospect theory that people overweight low-probability events – rare events receive more weight than they should based on their actual probability of occurrence. This assumption may help to explain why people bet on the National Lottery where the chances of winning the jackpot are 1 in 14 million.

Question 80

Prospect theory limitations

Answer 80

It lacks a detailed explicit rationale for the value function.  It is oversimplified.  The predicted overweighting of rare events sometimes fails to materialise.  Loss aversion occurs less often than predicted by the theory.  Individual differences and social and emotional factors are underexplored in the model.

Question 81

Impact bias

Answer 81

Overestimation of the intensity and duration of negative emotional reactions to loss.

Question 82

Neuroeconomics

Answer 82

Much of the relevant research lies within, in which cognitive neuroscience is used to increase our understanding of economic decision making. An approach in which economic decision making is understood within the framework of cognitive neuroscience.

Question 83

Impact bias

Answer 83

Overestimation of the intensity and duration of negative emotional reactions to loss. Overestimation of the intensity and duration of negative emotional reactions to loss is known as impact bias and has been found with predictions about losses such as losing one’s job or a romantic partner

Question 84

Loss aversion

Answer 84

They predicted losing $3 would have more impact on their happiness immediately and ten minutes later than gaining $5, which is suggestive of loss aversion.

Question 85

Omission bias

Answer 85

There is other evidence that emotional factors influence decision making. For example, consider , a preference for inaction to action when engaged in risky decision making.

Question 86

Can brain damage improve decision making?

Answer 86

An emotion such as anxiety can prevent us from maximising profit by making us unduly concerned about possible losses and therefore excessively afraid of taking risks. Percentage of rounds in which patients with damage to emotion regions of the brain, patients with damage to other regions of the brain and healthy controls decided to invest $1 having won or lost on the previous round

Question 87

Omission bias

Answer 87

British parents were asked questions about having their children vaccinated against various diseases. They were willing to accept a higher risk of their children having a disease than of their children suffering adverse reactions to vaccination (this is omission bias). In a similar study parents argued that the level of anticipated responsibility and regret would potentially be higher if they had their child vaccinated than if they did not.

Question 88

Another example of decision avoidance often caused by emotional factors is status quo bias –

Answer 88

Individuals often prefer to accept the status quo (current state) rather than change their decision. For example, many people keep the same allocation of retirement funds year after year even when they would not incur any costs by changing.

Question 89

Anderson (2003) proposed a rational-emotional model to account for decision avoidance including omission bias and status quo bias.

Answer 89

Within the model, both biases are explained in terms of regret and fear. We have seen regret is important. Fear is relevant because it can be reduced when someone decides not to make a decision for the time being.

Question 90

Simonson and Staw (1992) studied the effects of accountability on decision making in a study on the sunk-cost effect. Social functionalist approach

Answer 90

He argued that people often act like intuitive politicians, in that “They are accountable to a variety of constituencies . . . their long-term success at managing impressions hinges on their skill at anticipating objections that others are likely to raise to alternative courses of action” Limitations: 1. individual differences in the extent to which people feel the need to justify themselves to others are de-emphasised. 2. most research has involved laboratory tasks not making any real demands on social responsibility.

Question 91

According to multi-attribute utility theory (Wright, 1984), decision makers should go through the following stages:

Answer 91

1. Identify attributes relevant to the decision. 2 Decide how to weight those attributes. 3. List all options under consideration. 4. Rate each option on each attribute. 5. Obtain a total utility (i.e., subjective desirability for each option by summing its weighted attribute values) and select the one with the highest weighted total.

Question 92

Our decision-making ability is constrained by processing limitations

Answer 92

e.g., small short-term memory capacity). This led him to develop the notion of bounded rationality – our decision making is “bounded” by environmental constraints (e.g., information costs) and by cognitive constraints (e.g., limited attention).

Question 93

Bounded rationality

Answer 93

The notion that people are as rational as the environment and their limited processing capacity permit.

Question 94

Satisficing

Answer 94

In decision making, the strategy of choosing the first option that satisfies the individual’s minimum requirements.

Question 95

Schwartz et al. (2002) distinguished between satisficers (content with making reasonably good decisions) and maximisers (perfectionists).

Answer 95

There were various advantages associated with being a satisficer. Satisficers were happier and more optimistic than maximisers, had greater life satisfaction and experienced less regret and self-blame.

Question 96

Elimination-by-aspects theory,

Answer 96

Decision makers eliminate options by considering one relevant attribute or aspect after another. For example, someone buying a house may initially consider geographical location, eliminating all houses not lying within a given area. They may then consider the attribute of price, eliminating all properties costing above a certain figure. This process continues attribute by attribute until only one option remains.

Question 97

Loss aversion Arises from heuristics

Answer 97

Weighs the level at risk, compared to the loss at stake. | The negative psychological impact we feel from losing something is twice as strong to when we win something.

Question 98

Normative theories .

Answer 98

Prescribe what should occur in an ideal world (classical decision theory) and roughly align with Kahneman's System 2 thinking Normative decision-making models show how people 'should' make decisions,. They additionally, however, assume that all the information is readily available, that there is ample time for decision-making and that behaviour is rational. In actual fact, these ideal conditions don't always exist. We often end up making decisions under imperfect conditions and using heuristics—i.e. mental shortcuts that allow people to solve problems and make judgements quickly. While these quick rules of thumb are useful for many decisions, we run into trouble when we overuse them. It is important however to understand that heuristics are an important part of System 1 thinking and are often the only kind, or the best kind, of decision-making available to us.

Question 99

Descriptive theories

Answer 99

Describe the behaviour that people actually display (behavioural decision theory) and often align with Kahneman's System 1 thinking.

Question 100

Selective exposure

Answer 100

A preference for information that strengthens pre-existing views and avoidance of information conflicting with those views.

Question 101

Kahneman’s dual-process theory is oversimplified in several ways.

Answer 101

Consider the assumption we make judgement errors because we fail to monitor our intuitive responses. De Neys et al. (2011) used standard base-rate problems. On 80% of trials, participants produced incorrect intuitive or heuristic answers neglecting the base-rate information. The above findings suggest most participants totally ignored base-rate information. However, participants were less confident about their responses when they produced incorrect intuitive answers than when they produced correct answers. Thus, there is some processing of base-rate information even when it does not influence people’s judgements. Other research suggests this processing occurs below the level of conscious awareness (De Neys & Glumicic, 2008).

Question 102

According to Tetlock’s social functionalist approach

Answer 102

people’s need to justify their decisions to others accounts for some biases in decision making.

Question 103

Complex decision making

Answer 103

Decision makers in the laboratory and in the real world often start by reducing the number of options considered by eliminating aspects, followed by detailed comparisons of the retained options. However, experts often consider a single option and make rapid intuitive decisions. Making a decision can cause decision makers to misremember relevant factual information to increase the apparent support for that decision. According to Dijksterhuis’s unconscious thought theory, unconscious thinking is more useful than conscious thinking with complex decision making. Unconscious thinking is generally less useful than the theory suggests. However, decision making is sometimes best when individuals combine conscious and unconscious thinking.

Question 104

Decision making under risk.

Answer 104

According to prospect theory, people are much more sensitive to potential losses than potential gains. As a result, they are willing to take risks to avoid losses. The theory is supported by research on phenomena such as the framing and sunk-cost effects, and there is evidence of loss aversion in professional golfers, experienced poker players and financial experts. The theory de-emphasises individual differences, emotional and social factors in decision making under risk, and loss aversion is sometimes not found.

Question 105

Judgement theories.

Answer 105

According to support theory, an event’s subjective probability increases as its description becomes more explicit and detailed. This is often the case, but the opposite finding has sometimes been obtained (e.g., when the problem focuses people’s attention on low-probability causes). The recognition and take-the-best heuristics are rules of thumb that are often useful. However, these heuristics are more complex than usually assumed and are only useful in certain limited conditions. According to the natural frequency hypothesis, judgements are more accurate when based on natural sampling and frequencies rather than probabilities. In fact, the reasons for the superiority of frequency formats are varied and complex. According to Kahneman’s dual-process theory, initial intuitive processing (System 1) is sometimes followed by more conscious and controlled processing (System 2). This serial processing assumption is oversimplified as is the theory in general.

Question 106

Judgement research.

Answer 106

Our estimates of the probability of something happening change in the light of new evidence. When making such estimates, people often fail to take full account of base-rate information in part because of their reliance on the representativeness heuristic. Base-rate information is used more often when people are strongly motivated to use such information or when full causal knowledge is available. Some judgement errors depend on use of the availability heuristic. The representativeness and availability heuristics are sometimes used in real life.

Question 107

Introduction .

Answer 107

There are close relationships between the areas of judgement and decision making. Decision-making research covers all the processes involved in deciding on a course of action. In contrast, judgement research focuses mainly on those aspects of decision making concerned with estimating the probability of various events. Judgements are evaluated in terms of their accuracy while decisions are evaluated on the basis of their consequences.

Question 108

Decision making: emotional and social factors

Answer 108

. One reason people show loss aversion is because they overestimate the negative impact of losses. Reduced loss aversion and superior performance on a gambling task are shown by patients with damage to brain areas involved in emotion. Brain areas of relevance to risky decision making include the amygdala and the ventromedial prefrontal cortex. The emotion of regret helps to explain the existence of the omission and status quo effects. According to Tetlock’s social functionalist approach, people’s need to justify their decisions to others accounts for some biases in decision making.

Question 109

Unconscious thinking

Answer 109

As a result, unconscious thinking is better than conscious thinking at integrating large amounts of information. However, only conscious thought can follow strict rules and so is well suited to rule-based problems (e.g., in mathematics). They claimed conscious thinking is constrained by the limited capacity of consciousness. As a result, unconscious thinking is better than conscious thinking at integrating large amounts of information. However, only conscious thought can follow strict rules and so is well suited to rule-based problems (e.g., in mathematics).