Psych 179 Thinking
More examples of conjunction fallacy
-A man has a heart attack vs a man over 55 has a heart attack -likelihood that woman with an illness has one symptom or two symptoms
How can you avoid the gambling fallacy?
-First, you need to imagine that each event is independent from one another by imagining that you are at the beginning. That each time you flip a coin it is like the first time you're flipping the coin. -Build in randomization or automization of task. Flip a coin to decide if you should bet on red or black. Or for like reviewing applications, you can grade different applicants based on scales and then input them into a computer to determine who should be accepted all at once. -remind yourself a coin or a sperm or a dice doesn't have a memory, doesn't have ability to decide where to land
Expected Value Theory
-Normative model -choose alternative with the maximum expected value -EV=sum(outcome*probability)
What is an example of mispredicting utility? (studies)
-Students in college were asked to rate how much happiness they would have in each of 12 houses, and then 2 years later they reported their actual happiness. Their actual happiness in undesirable dorms was higher than expected, happiness in desirable was less than expected, no difference between happiness in either undesirable or desirable. -Life satisfaction goes down over time after marriage
What are real life examples of temporal discounting?
-Unhealthy behaviors (not valuing future health) -Procrastination (discounting future pain)
Sitution A: G1 (1, $30) G2 (.8, $45) Situation B: G3 (.25, $30) G4 (.2, $45) Why is it irrational to choose G1 and G4?
-non-normative, violates EU theory -The choice between G1 and G2 is essentially the same as the choice vetween G3 and G4 except the probabilities for Situation A are 4 times larger than those for situation B (100%-80%)=4*(25%-20%)
What studies/examples show the availability heuristic?
-people thinking the letter L appears more often in the first than the third position of words. -relying on an anecdote -reading about airplane crashes and being scared when ppl die more often in cars -shark death fear (summer of the avocado) -Study: husbands and wives overestimated how much they did of cleaning, making breakfast, starting arguments, etc. because their actions are more available in their mind (totals equalled more than 100%) -Study: students had to say how much work they had individually completed, total more than 100% -->reduce overestimation by asking them to think about each group member's participation (making other members' contributions available in their mind)
What is the Expected Utility Theory?
-utility=subjective value -EU=sum(utility*probability) -maximize expected utility -EU=.6*u($500)
Example of why we overweigh low probabilities and underweigh high probabilities in Prospect Theory:
1 bullet vs 2 bullets and then 14 bullets vs 15 bullets in Russian roulette
What are different heuristics people use to judge probabilities?
1) Availability heuristic 2) Representativeness heuristic 3) Anchoring and Adjustment (after exam 1)
What are judgement errors due to the use of the representativeness heuristic?
1) Base-rate neglect 2) Conjunction fallacy 3) Gambler's fallacy
How does fluency increase utilities?
1) Coure evaluations, stock market performance 2) Order effect in evaluations
What does reason-based choices cause?
1) Custody dispute/question framing effect/violation of procedural invariance 2) Going to Hawaii/disjunction effect/violation of sure thing principle 3) Asymmetric dominance
What are examples of people focusing on a salient dimension affecting their utility perceptions?
1) Focusing illusion (ignoring other important dimensions) 2) Peak-end rule
Why is the expected value theory not descriptive?
1) If expected value theory was descriptive, lottery, insurance, and gambling companies would not make a profit. (tickets worth more than EV of lottery) 2) EV relies on $$$, but many people have subjective preferences/values. 3) Risk Aversion 4) All phenomena EUT cannot explain. (violating transitivity, violating descriptive invariance--framing effect)
Why can't we wait?
1) Overweighing small probabilities (fear of uncertain future) --> solution: imagine being in position of power, write about time you had power 2) Psychological distance (future feels distant, fuzzy, abstract, forget details --> procrastination, undervaluing future benefits) --> Think about specific future episodes (overweight women presented with unlimited food, listen to audio recording of woman's travel blog or musings on good things in future-->ate less food) 3) Lack of self control (marshmallow test, only 1/3 could wait, more self-control-->SAT scores) -->remove marshmallow from sight, provide a toy, think of other happy thoughts
Why do we misperceive/mispredict utilities?
1) Reason-based choices 2) Fluency increases utilities 3) Difficulty combining multiple dimensions 4) Temporal discounting 5) Ambiguity Effect 6) Sunk cost
What is the subjective probability according to the Prospect Theory?
1) They overweigh low probabilities 2) Underweigh high probabilities
What did the study on pronounceability and stock fluctuations show?
1) When the pronounceability of share names were manipulated, the pronounceability of the names estimated the performance of each stock after 1 year of trading. (fake stock names) 2) When studying the pronounceability of three-letter stock ticker codes, they found that stocks with easy to pronounce names robustly outperformed stocks with difficult to pronounce names in the short term.
What is a study showing how reason-based choices can impact our decisions irrationally? (custody)
A study describes Parent A and Parent B. Parent A is pretty average, but Parent B has some more extreme positive and negative traits (avg income, health, hours versus above-avg income, close relationship, minor health problems). When participants were asked who they wanted to awared sole custody to and who they wanted to deny sole custody to, they said Parent B both times which is illogical because if you want to award one parent custody, you should want to deny custody to the other parent. This is due to people's desires for reason-based choices. Parent B has provides more reasons to award and deny custody.
What is the sunk cost fallacy?
An individual has already invested money, time, or effort and decides to continue in this situation because of the initial investment.
What is asymmetric dominance?
An option is asymmetrically dominated when it is inferior in all (or almost all) respects to one option, but when compared to the other option, it is inferior in some respects and superior in others. The Asymmetric dominance effect is when the introduction of a third product that is asymmetrically dominated influences people's decision between two products.
Why does order effect occur?
As individuals become more familiar with a decision making process, they would perceive the process as more fluent --> and misinterpret that as being good -as judges completed repeated evaluations, they experienced more fluent decision making, producing more positive judgements
How can you tell if you should persist?
Can you breathe?
How can processing fluency affect our perception of utilities? (Course evaluations)
List 2 ways the course could be improved --> easier/ less fluent --> lower rating List 10 ways the course could be improved --> harder/ more fluent
What is loss aversion? What is it caused by
Losses loom larger than gains. Losses are perceived as about 2.5 times more painful than gains. This is caused by the loss function being steeper than the gain function so the perceived pain from losing $100>the pleasure of gaining $100.
Is EUT normative or descriptive?
NORMATIVE! Although utilities are subjective, EUT is normative because it tells us what decisions should make based on their personal, constant subjective utilities. -must follow transitivity -must follow descriptive invariance
What is descriptive invariance?
No matter how the options are framed, you should be consistent with what you choose. i.e. U(80% of being accepted)=U(20% of being rejected) -utilities should not depend on how options are DESCRIBED
Conditional Probability
P(A|B) does not equal P(B|A)
Bayesian Theorem
P(A|B)=P(B|A)*P(A)/P(B|A)*P(A)+P(B|not-A)*P(not-A) = P(B|A)*P(A)/P(B)
What is a study showing the disjunction effect?
Participants are told that they have either failed an exam, passed an exam, or do not yet know their grade for an exam, and then they have the opportunity to buy an attractive vacation package that will expire the next day (before you get your test results back). People who were told their failed their exam or passed their exam chose to buy the package over 50% of the time. However, for participants told they did not yet know their test grade, only 32% wanted to buy the package, and 61% chose to pay a $5 nonrefundable fee in order to retain the right to buy the vacation package the day after tomorrow. If participants were willing to buy the vacation package whether or not they passed or failed the exam, then not knowing if they passed the exam, they should've also bought the vacation package instead of witholding their decision.
What study shows sunk cost fallacy?
Participants are told to imagine that they have paid $100 for a ski trip to Michigan and $50 for a ski trip to Wisconsin. They prefer the Wisconsin trip. The trips are on the same weekend, so they have to choose which one they want to go to. Most participants chose Michigan because they see it as them investing more into that trip. However, that's irrational because when you apply the sure thing principle, you realize that you spent $150 no matter what, so you should make your choice based on trip preference.
What is another example of the peak-end rule? (water study)
Participants immersed their hand in cold water. There was a short trial that was 60 seconds at 57 degrees F and then a longer trial that was 60 secs 57 degrees F and then 30 seconds 59 degrees fahrenheit. Ppl preferred the longer pain trial because it had a better ending.
Tell me about a study showing peak-end rule? (video)
Participants were shown either a long version or a short version of a happy penguin video and an arm amputation video. -duration did not predict the overall evaluation -overall ratings were predicted by the peak rating and the final rating
How can you get connected to your future self? (study)
Participants were told they given a $1000 windfall and asked what they would do with it. If they were shown a digitally aged version of themselves, they were more likely to put it in their retirement funds
How does focusing on a salient dimension impact people's perception of utility?
People are not good at combining multiple dimensions, so they only focus on the most salient dimension and ignore other dimensions.
What is the confunction fallacy?
People assume P(A&B)>P(A) Is it more likely that feminist Linda is a democrat and a bank teller or just a bank teller? Just a bank teller. Because of representativeness heuristic, we often violate the normative probability theory.
What is the gambler's fallacy?
People believe that the chance processes should be self-correcting so that if an event has not occurred in a while, it is now more likely to occur -example: the roulette wheel's ball had fallen on black several times in a row, people started betting on a red square, the ball fell on red after 27 squares -family with 5 boys tries having a girl
The probability of breast cancer is 1% for a woman at age 40 who participates in routine screening. If a woman has breast cancer, the probability is 80% that she will have a positive mammogram. If a woman does not have breast cancer, the probability is 9.6% that she will also have a positive mammogram. A woman has a positive mammogram. What's the probability that she actually has breast cancer?
People often say ~80% because a woman with a positive mamogram sounds highly representative of a woman with breast cancer. In reality, P(B|P)=P(P|B)*P(B)/P(P|B)*P(B)+P(P|no-B)*P(no-B) .8*.01/(.8*.01)+(.096*.99)=.078 7.8%
What is the peak-end rule?
People tend to ignore the duration of pain or pleasure. Overall ratings are predicted by the peak rating and the end rating.
What is the representativeness heuristic?
People's judgements of likelihood are based on the representativeness of events/people/objects. -think its more likely that a man is a stereotype because he is representative of a serial killer
What is procedural invariance?
Preferences should not change depending on whether people are asked to make the choice in one way or another way that is essentially the same as the first. (Which one do you like more? Which one do you like less?)
What is risk aversion?
Preferring a sure amount of money over a riskier outcome even if the EV of the riskier outcome is higher. i.e. preferring 100%, $500 over 50% $1,000 even though they have the exact same EV
How does Prospect Theory explain the framing effect?
Prospect theory shows why people would be risk aversive when talking about gains and then risk seeking when talking about losses. The fact that the gain function is concave and the loss function is convex explains the framing effect.
What is temporal discounting?
Rewards lose their utility over time. ($340 now versus $400 4 months from now)
What is a study that shows how people focus on a salient dimension and forget other dimensions? (focusing illusion)
Scientists asked undergrads living in Midwest or California what they think the life satisfaction of a similar other would be, and people assumed that if they were living in California, they would be happier. However, their self-reported life satisfaction was equal. That's because they focused on salient factors like weather and ignored other factors that impact your happiness (i.e. laundry, chores, parties, sex).
What is study showing the endowment effect? (chocolate mug)
Scientists gave some people the option of choosing between chocolate or a mug. It was about 50/50 (56%). Then, the scientists gave people a mug and asked if they wanted to exchange it for a chocolate bar, but 89% of people decided to stay with the mug. Then, they gave some people the chocolate bar and asked if they wanted to exchange it for the mug, and 90% of people stuck with the chocolate bar. Rationally, people should have chosen at about the same rates either the mug or the chocolate bar, regardless if they were given one first, but instead, they preferred the one that they had been given first because they are averse to losing it.
Why, according to EUT, are some people risk averse?
Since the EUT graph for most people is concave, that means that the EU(100% $5000) is greater than the EU(50% $10,000)
What is the Allais Paradox?
Situation X Option A: 100% $1M (people prefer because certain $1M) Option B: 89% $1M; 10% $5M; 1% $0 Situation Y Option C: 11% $1M, 89% $0 Option D: 10% $5M, 90% $0 (prefer) Violation of same-thing principle. In both scenarios, you have a decision between EU(A&C)=.11xU($1M) EU(B&D)=.10U($5M)+.01xU($0) Practice this!
What is order effects in processing fluency?
So as people repeat a decision-making process, they become more fluent in making that decision and can misattribute their increased fluency for higher utility. For example, a study showed that in Dancing with the Stars, scores increased significantly as a function of season & second half of season higher than first half of season. -GPA increased over successive course offerings -When people had to evaluate stories each weekday for 2 weeks, their ratings increased
Is prospect theory descriptive or normative?
Descriptive
Why did some scientists argue that humans didn't actually neglect base rate?
Base rate neglect not caused by true base rate neglect. Simply beause of using probability format. More used to frequency formats.
Why might people be risk averse?
Because the gain function is concave, so a sure amount is preferred over a risky bet that has the same expected value.
Why are most people risk-seeking for losses?
Because the loss function is convex, so they take the gamble over a sure loss in the hope of paying nothing. .5*U(-$1000)<U(-$500) Also, don't mind spending $100 more when you're already spending $1000.
Why do we prefer G1 over G2 and then G4 over G3? (certainty effect)
Because we underweigh larger probabilities compared to certainty (p=1).
According to expected value theorem, should you choose gamble 1 : (.2, $40; .8, -$10) or Gamble 2: (.25, $30; .75, $5)?
EV(G1)=(.2*40)+(.8*-$10)=$0 EV(G2)=(.25*$30)+(.75*(-$5))=$3.75 So you should choose gamble 2
What is the availability heuristic?
Estmates of frequency or probability are made based on the ease with which instances come to mind.
Why is ethnic profiling irrational?
Ethnic profiling is using representativeness heuristic. People falsely assume that the probability someone is a terrorist given that they're a muslim is high. Very very unlikely. Ignores that base rate of being a terrorist is very small compared to a very large muslim population.
What can fluency do?
Fluency in processing can determine believability and utility of things.
Why might people violate transitivity?
For example, if there are small increments in price and then you see the larger difference, you might not prefer the more expensive one which violates transitivity. -Maximizing EU--> forced to follow transitivity -people ignore one dimension until it gets too large that they can't ignore it
How is the gambler's fallacy an example of the Representativeness heuristic?
GBGBGB looks more representative of a random sequence to us than GGGG.
What are real-life examples of endowment effect?
Hoarding clothing, not actually returning clothing to stores, free trials -reframing situation can help with this (which clothes do I want to save instead of which do I want to discard)
What is a real life example of sunk cost fallacy?
I attended CHEM for 30 hours, but I would rather do HIST, but I'm going to stick with CHEM because I put all of that time and efffort in. No matter what, you've put that effort in so you should choose the HIST class. -to overcome sunk cost fallacy, frame choices so that you can apply the sure thing principle
What is transitivity?
If you choose A over B (A>B) and then you choose B over C (B>C), you should choose A>C.
Is temporal discounting rational?
It is rational if people are considering the real interest rates, inflation, investment benefit, chance of something happening (economy crash, death). However, 1) People behave like their personal discount rates are much higher than the interest rate available in the market. 2)We discount much more than the chance of unforeseen events. 3)We discount inconsistently.
What is the law of diminishing returns?
It means that in the utility function for Prospect theory, it is concave so that the objective value of gaining $100 more is less and less as the base amount of money increases (i.e. $0 vs $100 and then $500 vs $600)
What would the graph of someone who is risk-seeing look like? (thinking about EUT)
It would be convex because then the the EU(100%, $5000)<EU(50%, $10,000)
What does a typical utility function look like?
It's concave down so that the utility of $10 vs $20 is a lot bigger difference than the utility between$110 and $120. -Utility functions can take any shape -EU can describe risk aversion while EVT cannot -Does not say ppl should be risk aversive
What is the framing effect?
Its when you make a different choice depending on how options are framed.
What are the perils of too much self control?
Study: disadvantaged black teens from rural Georgia, measured self-control, collected DNA to measure epigenetic aging -more self control, less substance use, violence -more disadvantaged SES showed more epigenetic aging the more self control they had -->better self control want to overcome disadvantages, too much to handle
Prospect Theory
Subjective Value (like EUT), subjective probability (unlike EUT and EVT), descriptive 1) Gain function is concave (risk-aversive for gains) 2) Loss function is convex (risk-seeking for losses) 3) Loss function is steeper than gain function (loss aversion)
How does Prospect Theory explain the Allais Paradox?
The difference between 0% chance of $0 versus 1% of $0 feels a lot bigger than the difference between 89% and 90% (overweighing small probabilities) -subjective probability function
What is the endowment effect?
The endowment effect is an example of loss aversion. People ascribe more value to things merely because they own them.
What would it mean if the graph of someone's EU is y=x?
The expected utility would be equal to the expected value. They would have no risk aversion.
Why do we choose the gamble with the highest expected value?
The expected value is the long-run average value yielded by that alternative.
How should we rationally gauge the utility of a hedonic experience?
The overall utility of an experience should be the sum of the components. Our utility perception deviates from it.
What is a real-life example of asymmetric dominance?
The sales of X doubles when a more expensive breadmaker is introduced that is more expensive and not any better. Williams-Sonoma breadmaker X: $275 Z: $429 not any better (slightly larger but cannot bake whole-wheat bread)
What's a study showing the framing effect?
There is a disease that is expected to kill 600 people. There are two programs described. Program A: 200 people will be saved. Program B: There is a 1/3 probability that 600 people will be saved and a 2/3 probability that no people will be saved. People prefer A. However, when the options are framed as: Program C: 400 people will die. Program D: 1/3 probability that nobody will die, and 2/3 probability that 600 people will die. People prefer D. But A=C and B=D. When meat was described as 75% lean versus 25% fat, people assumed the 75% lean meat was leaner, more greaseless, more high quality, and better-tasting even after trying the beef.
Why did students like that they would be happier at desirable dorms?
They focused too much on salient aspects (location, dining hall) while ignoring other factors (adaptation, students, etc.)
How do people often judge probabilities? What is a heuristic?
They usually use a heuristic. A heuristic is a rule of thumb, a short cut. Easy to use but doesn't guarantee an accurate answer.
What is a study showing asymmetric dominance?
U(X)=U(Y). Even if a Z is introduced, U(X) should be the same as U(Y). But introducing Z actually increased the probability of choosing X because Z (inferior price and same quality; obviously worse than X) gave people a reason to choose X. X: less expensive, poor quality Z: more expensive, poor quality Y: expensive, good quality
What explains the Certainty effect?
Underweighing large probabilities compared to certainty
Descriptive Theories
What people actually choose and why
What is a study showing the endowment effect? (mugs selling)
When given a mug, students were willing to sell them on average for more money than what they were willing to buy them for (seeing mug as a loss versus a gain).
What is the disjunction effect?
When people do not know what situation they are in (i.e. when they are in a disjunctive state), they tend to withhold making a choice. -because they don't have a reason for the choice -irrational if the choice would go the same way whatever situation they were in -you will do x given A occurs and you will do x given A doesn't occur, but you will not do x when the outcome of A is unknown
What is base rate neglect?
When we ignore the prevalence of an event or thingdue to the representativeness heuristic. For example, how likely is it that a book-lover is a librarian or a doctor? There are more doctors than librarians. -going on WebMD and assuming you have illnesses that are very rare
Normative Theories
correct choice according to probability theories